Almost two-thirds of East African banks have said that digital transformation was their most important priority, which is understandable given that it is perhaps the most innovative region for financial services on the continent.

With the highest mobile money penetration rates in the world, it is no surprise that Kenyan and other East African banks have been among the first to roll out retail and SME platforms for their customers. 

According to African Digital transformation report 2024 published by Amsterdam headquartered Backbase this week, only one out of ten banks do not regard it as one of their three biggest priorities and some say could have already invested heavily in their mobile and online infrastructure and are now focusing on other areas. 

The 10 percent is close to the 8 percent figure of East African banks that have transformed less than a quarter of their operations to date, a figure that reflects the level of technological adoption in East African financial services. 

“A third of our respondents in the region had transformed more than 75 percent of their operations, as more banks move towards completing the process, at least with regard to first generation transformation,” Backbase report reads. 

“Even once digital structures are in place, there will be plenty of scope to upgrade, expand and improve existing platforms. There is a fair range of budgets on display in East Africa, which may reflect the widely varying size of the region’s banks.” 

While 27 percent spend more than US$3m a year, indicating a strong focus on mobile and online platforms, 17 percent spend less than US$300,000 a year. 

Almost a third of the region’s banks work exclusively with third-party developers to build their platforms, highlighting a growing pool of experts that is emerging with specialist knowledge of the region. 

As in West Africa, regulatory and security concerns are the most significant challenges East African banks face when integrating new digital solutions with existing legacy systems. 

This may be because the East African Community (EAC) is seeking to harmonise cross-border digital payment and banking regulations. 

Although progress has been limited to date, all banks based in the region will be required to comply with EAC regulations but the details of the new rules have not been finalised, even as they develop their own digital infrastructures.

 At the same time, however, legacy mindset is not regarded as a major obstacle within the region, reflecting the generally innovative and forward looking nature of East Africa’s financial services industry as a whole. 

A massive 39 percent of East African banks are prioritising the SME sector in their digital investment over the coming year, with just 15 percent focusing on retail banking. 

This is not because they do not consider the retail sector important, nor that it generates a lower proportion of their revenues, but is likely to be because many banks have already built their retail platforms and are now expanding into SME provision. 

Once the benefits become apparent from the retail segment, it makes sense to roll services out in other forms of banking, with SMEs the obvious next step.

East African banks regard the ease of integration with other core and recordkeeping solutions as the most important parameter when selecting a customer engagement solution. 

As digital channels play a pivotal role in customer engagement, having the right operating model will increasingly determine a bank’s ability to thrive in a dynamic and competitive market. 

Interestingly, the region’s banks regard adopting a proven solution as being of relatively little importance, placing far more value on whether or not it comes from a trusted vendor. 

While 30 percent of East African banks exclusively deploy their customer engagement solutions on their own premises, most locate at least a proportion of them elsewhere, including in private and public cloud storage or a mix of all the available options. 

Almost half of them are incorporating AI into their digital transformation strategies, with another 30 percent investing in big data, so it is clear that digital storage capacity is becoming increasingly crucial to banks in the region. 

Banks therefore face some big decisions over the next few years on whether to build up their own data capacity or opt for remote data centres. 

Large new data centres are already being set up in Nairobi, including iXAfrica, which is the region’s largest hyperscale carrier-neutral data centre, and NBO1 Nairobi Data Centre in Sameer Industrial Park, which offers long-distance fibre routes to Uganda, Tanzania, Rwanda, Burundi, Ethiopia and even Somalia.