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By Francis Lutalo
The banking industry is facing unprecedented times with the need to adapt faster to emerging technology to serve the ever-changing client needs.
Faced with competition from other third-party service providers and middlemen, banks are exploring how to replace the current traditional banking infrastructure with the transformative power of blockchain technology to speed up payments, remittances or even day-to-day over the counter transactions.
Advanced economies such as the USA and China have already demonstrated considerable success with blockchain technology in digital currencies, payments and remittances with the global south slowly catching up. Rwanda and Ghana are prime examples in Africa exploring this arena.
Unlike the traditional banking model which requires networks and a number of personnel for transactions to be recorded, and which could eventually be altered or tampered with; Put simply, blockchain allows for the permanent, immutable, and transparent recording of data and transactions.
Blockchains are a type of digital ledger that cannot be altered, deployed in a distributed manner enabling a group of people to track transactions among themselves via a shared ledger. Because of how the network was designed to work, once a transaction has been recorded on a blockchain, it cannot be modified.
The transparent and efficient nature of blockchain technology has proved to be useful to deploy in various use cases such as making direct payments to a last mile user while eliminating high commission fees from third parties.
A major use case for blockchain that will forever change the face of banking, is financial inclusion.
A number of Ugandans remain unbanked, let alone being able to have access to digital financial services. Nevertheless, there’s hope and a lot of opportunities!
According to a 2023 Finscope survey, the proportion of Ugandans using digital transfers has slightly increased since 2018 from 57 percent to 64 percent. Men still dominate the women in the use of digital transfers as is the case with urban and rural areas.
SACCOs and Mobile Money continue to register the highest increases in adoption since 2018 with the proportion of Ugandans utilizing them more than doubling. However, the main barriers to formal financial services continue to be affordability, relevance and awareness.
With the advent of fintech and mobile money, a lot of Ugandans now have digital and mobile wallets, but this just remains a conduit for someone to receive money and they cash it out.
PostBank has invested in infrastructure and innovation like Wendi mobile wallet which is designed to offer seamless financial services to underserved and last-mile customers.
Therefore, users can access, manage, and transact funds efficiently on both the smartphone and feature phone and this financial inclusion strategy perfectly aligns with the banks purpose of fostering prosperity for Ugandans.
Financial inclusion should go beyond just sending and receiving money and look at how money stays in the economy. This is possible only if we adopt and adapt quickly to using blockchain technology by eliminating the costs and delays associated with the traditional way of making transactions, and having more people involved in the money economy.
Having more people financially included means we should move fast to harmonise the Know Your Customer (KYC) requirements using blockchain’s immutable nature to create efficiency across the banking system.
Banks have a number of KYC requirements for clients who want to open up a bank account or acquire a loan. PostBank’s digital channels have made it easier to process KYC requirements with our ZeroFlex Digital account. But we can still do more!
Imagine, if banks adopt a blockchain system to harmonise all the KYC details on one ledger. KYC harmonisation and integration between banks means we have a pool of information to tap into for all the banked people. The advantage to this is that blockchain is immutable, which means no one can alter the KYC details of clients.
Similarly, blockchain remains an untapped resource in recording data and building credit scores and worthiness of potential clients. The technology keeps a record of credit transactions for whatever channel is used whether it’s fintech, mobile money or banking.
This record of transactions makes it easier for a bank to verify the credit worthiness of a client based on a blockchain ledger of the client’s transactions that are verifiable on a chain.
However, compliance remains key in our pursuit of blockchain technology benefits. The Blockchain Committee in Uganda which I’m part of, serves a purpose of benchmarking and scanning for use cases and making a report for policy formulation and compliance framework.
We’re at an advanced stage of having the compliance framework.
From an integration perspective, we have invested in the technology and we’re building capacity, and we wait for a greenlight from Bank of Uganda.
As we move to adopt this technology, there are concerns that there will be a need for consumer protection. That’s why we need to strike a balance between the benefits of blockchain while protecting the consumer. It is a delicate balance but very important.
From an implementation perspective, we need public private partnerships to invest in connectivity, internet data centres to deal with the huge amounts of financial and customer data generated.
The government has shown willingness to reduce the cost of data which is a step in the right direction, and we hope this can go a long way in fostering prosperity for all Ugandans.
Francis Lutalo is the Head of Business Technology at PostBank Uganda