You can learn lots of interesting things at conferences, and one of the most interesting observations I’ve come across in the last several weeks came from Jaco Grobler, Chief Risk Officer (CRO) for FirstRand Group, the largest financial services institution by market capitalization in Africa. Grobler was onstage during the IIF’s Annual Members conference and during his panel mentioned that banks in Africa are adopting different strategies towards tech than their counterparts in the telecommunications sector. Specifically, Grobler noted that banks in Africa tend to adopt technology solutions from the West, whereas telecoms are experimenting more with Chinese technology.
It’s a fascinating observation, which begs the question why. For sure, different sectors in any economy may source vendor and other relationships with different countries. But often, we tend to think about vendor relationships, even providers of technology solutions, as at least in part, extensions of trade relationships. A country may have dominant relationships with the US, Germany or Japan, and the assumption is that such dominance is, well just that, and bleeds across sectors. And one certainly wouldn’t expect too many differences between sectors if the technology or service in question concerns an overlapping domain of two industries.
Still, regulations can certainly play a role in creating very different choices between sectors. Even where companies may be trying to deliver similar services—think banks and social media firms trying to offer bank-like services—they may not be subject to the same oversight, or the same sensitivity to it. As a result, the regulatory framework within which any particular services provider is operating, whether in Africa or the United States, could very well impact the decision-making as to where third-party inputs and services are sourced.
Banks, for their part, are usually among the most stringently regulated institutions in the world. Regulators from Nairobi to New Jersey want to make sure that what a banks does is safe and sound—and will not generate financial instability or take down a national economy if it fails. And there’s a reason—they take on-demand deposits from individuals and lend it for the long term, which makes their balance sheets inherently fragile.
Telcom rules, by extension, focus on the degree to which a major firm exhibits monopoly power. Creating a telcom requires considerable outlays of capital and infrastructure, as well as reliance on government owned or regulated resources. As a result, governments watch companies carefully to ensure they are serving public goals alongside their profit-making activities.
As a result, it’s not hard to imagine that banks in Africa may be a lot more sensitive to questions about how regulators respond to technology sourcing than telecoms, assuming of course there are no national security considerations at play. Regulators view banks (along with a set of other actors like stock exchanges, public companies, etc.) as central financial gatekeepers. If these gatekeepers offload key functions to third parties, there will be an interest in ensuring that the third-party vendors and suppliers pose minimal operational and prudential risks.
Telcoms aren’t used to taking these kinds of concerns into consideration. So if African telecoms see interesting (or cheap) tech coming from China, there’s the possibility that they might have fewer reservations about experimenting with it, or even relying on it. Meanwhile banks, used to (and perhaps concerned with), regulators constantly looking over their shoulder, might be less willing to jump into the great technological unknown with firms coming from jurisdictions with shorter histories and less reputable oversight. When faced with the choice between China and the United States or Europe, the decision may seem comparatively easier, especially if operating in a risk averse supervisory ecosystem.
I want to stress that other, perhaps simpler explanations could be at play. But I offer this theory, more than anything, to illustrate a simple point–namely that focusing regulatory attention on entities, instead of activities, enables a number of potentially unexpected repercussions throughout the financial system. Not only do opportunities for arbitrage arise, but also entire industries may adopt highly different national sources of technology solutions. And even where regulation is functional in orientation, it still might not anticipate the kinds of legacy cultural attitudes that can lend to very stark differences in industry behavior. What this means, is anyone’s guess, but as boundaries are blurred in the provision of financial services, we’re bound to find out.