Sri Lanka dawdles in digital

Sri Lanka’s banks have a tough time weaning their customers off slips of paper and conventional counter service: there’s nothing quite like banking the old way, at a branch.

National Development Bank says the greatest challenge the country’s lenders face is a “lack of customer inclination for digitally driven banking services”. In terms of its own experience, NDB – which is the winner of Asiamoney’s award for best bank this year – adds that while millennials have embraced digital, “within the overall customer base of the bank, there is still a significant segment of customers who tend to opt for conventional banking”.

That is putting it mildly. Sri Lanka is a curious financial services market, in that it is deeply and, for those who like that kind of thing, almost nostalgically old-fashioned. The best lenders in the private sector (Commercial Bank of Ceylon, Hatton National Bank, NDB) and the public sector (Bank of Ceylon, People’s Bank) are respected, trusted, prudent and well run.

They have worked hard, particularly since the end of the civil war in 2009, to bring banking services to the poorer hinterland, particularly in the north and east. Shehan Senanayake, a financial analyst at Colombo-based Frontier Research, puts the level of domestic financial inclusion at around 80%, well above the region’s average.

In many parts of the country, the big banks, particularly those run by the state, are cornerstones of the community. People instinctively gravitate to their local branch to pay utility bills, draw pensions and transfer money.

For many here, the physical, not the digital, is an instinctive part of financial life. Cash, Senanayake adds, is still “the preferred way to operate, particularly in rural areas”.

And for anyone who only visits Sri Lanka to do business in Colombo, tarrying only to gaze at the extraordinary sight of the new Port City financial hub taking shape on reclaimed land, it is easy to forget that the country has an overwhelmingly rural population. Just 19% of people lived in urban areas in January 2018, according to UN data, against a global average of 55%.

For banks, these can be comforting or complicating factors – or both. No one can accuse the island’s better banks of failing to invest wisely and widely in their digital platforms. Nations Trust Bank was the first to launch a pure digital banking service, FriMi, transforming it into one of the nation’s best.

Commercial Bank of Ceylon’s digital division, Flash, is highly regarded, as is National Development Bank’s fully digital and paperless branch, NDB Neos, which opened in 2018.

People’s Bank, winner of this year’s Asiamoney award for best digital provider, has 136 branches dotted around the country, staffed by 500 ‘agents’ responsible for transferring customers from the offline to the online world. And in June 2018, Sampath Bank broke cover on blockchain, launching an app that allows account holders to ‘gift’ up to SLR10,000 ($56) to anyone in their smartphone’s contact list.

But the question is how many people actually use these services? While Sri Lanka is not a technophobic country, it has been slow to catch up to modern ways. Look around the room the next time you have breakfast in a high-end Colombo hotel. People are chatting away amiably or reading newspapers; relatively few are scrolling through their smartphones.

This may be very good for their mental health, but it does reinforce the sense that when it comes to digital finance and overall digital inclusion, Sri Lanka is a few steps behind the curve. According to UN data, 42% of the world’s people are active users of social media, whereas in Sri Lanka that share falls to 29%.

When Asiamoney visited the island in early 2019, the same question was asked of every bank chief executive: Did most Sri Lankans view their bank as a place to visit (offline) or as a service to experience (online)?

And was it fair to perceive the country as a laggard, in terms of the speed of take-up of digital banking, as a hotbed (or not) of financial innovation and as an eager (or apathetic) embracer of mobile financial services?

Union Bank of Colombo is a smaller private bank owned by US investment firm TPG Capital. It is expanding its reach into corporate banking, and its chief executive Indrajit Wickramasinghe says he is “very focused” on his digital plans.

“We have invested heavily in improving our digital cash management services, and pushing as much as we can online,” he says.

But he admits that trying to convince retail customers to give digital services a try can at times be a lesson in futility. The country has been “slower to embrace digital and fintech”, he says. “Culturally, a lot of people still prefer to visit the bank.”

It’s a view shared by many others.

Chaminda Fernando, head of online and mobile banking at Commercial Bank of Ceylon (CBC), points to the bank’s “many campaigns” to increase digital awareness: “We guide people through the products, and explain how we operate, giving them hands-on experience. Digital is gradually penetrating the market, but it is definitely happening slowly. [Many customers are] still reluctant to go digital.”

This foot-dragging over something so simple and convenient seems to catch even seasoned bankers by surprise.

Dimantha Seneviratne, group chief executive of NDB Bank, is investing heavily in digital. His aim is to “emulate the best of the world’s best digital banks, like [Singapore’s] DBS”. Plans are in place to roll out new, fully automated NDB Neos outlets around the country, able to sign up customers with a minimum of physical friction. But currently, just 39% of his customers use tablets, cellphones or computers to bank with NDB.

As one Colombo-based banker puts it, marketing online products to customers is tough.

“We are now a mass-market lender, but when you leave the urban areas, you find people who still want that interaction in the branch,” he says. “If you are 22, 23 years of age, you are online or using ATMs, but the rest are still walking up to the counter. So we still keep them open, for the people who want a relationship beyond a screen.”

At CBC, the country’s largest private-sector lender by assets, deposits, employees and branches, there’s a familiar sense of frustration. Over coffee with S. Renganathan, the chief executive, his exasperation with the slothful rate of digital take-up is both real and very funny. We discuss the bank’s digital platform, and its partnership with Hangzhou-based Ant Financial Services, announced that week, to deliver QR-based payment services to Chinese tourists.

Then he mentions e-Passbook, a simple service that allows customers to download and view account transactions on their smartphones.

“It is free of charge to any customer who opens a savings account,” he says. “But 95% of them, even the 18-to-35-year-olds, also ask for a printed, hard-copy savings passbook. Why? Because when they open a bank account, they still want to feel something solid in their hand,” he says.

“It’s shocking,” he adds, shaking his head. “We tell customers we can email them the digital passbook, where they can see their accounts and their balance with a simple click. But people still want that paper ledger! Our tellers encourage people to adopt only the e-ledger, but still they want the printed passbook. We are even thinking of charging for it, maybe SLR500 ($2.80).”

Fintech in Sri Lanka is more of a mixed bag. Probably the most digitally innovative non-bank financial provider is Dialog Axiata, a division of Malaysia’s Axiata Group and the island’s largest telecoms firm. Its mobile money service, eZ Cash, launched in 2012, was a success from day one. In 2017, it processed SLR25.5 billion-worth of transactions; at the end of the year, it had three million users.

In September 2017, it took the next step by buying a majority stake in local non-bank financial company Colombo Trust Finance.

That division, now named Dialog Finance, is preparing to roll out, from the second quarter of 2019, a host of new online lending services, and aims to make a concerted push into fintech by allying itself with local or foreign digital financial providers. A spokeswoman says it is “too early” to reveal specifics about new products, but bankers in the capital are eyeing the firm’s progress with a mix of eagerness and trepidation.

Mobile money and payments services, reckons Frontier Research’s Senanayake, count as the country’s “most significant” fintech success.

EZ Cash aside, at the end of 2017 there were 12 central bank-licensed mobile-money operators, and two providers of cellphone-based e-money services.

If digital banking is growing fast anywhere, it is on hand-held devices. According to central bank data, 2.36 million bank transactions were completed on smartphones in the third quarter of 2018, an increase of 139% over the previous year. According to Statcounter, 76% of all internet traffic flowed over mobile devices in 2018 in Sri Lanka, up 5% over the previous year.

Senanayake says regulation has been “conducive to disruption” in this corner of the fintech space, but he warns of a “lack of awareness of these products in rural areas, [where] a lot of people don’t realize they don’t need to have a bank account to use mobile money. It stems from a lack of education from the central bank to show how these services make one’s life better. If they do this, it will improve fintech’s fortunes: financial inclusivity won’t be achieved until we capture this market.”

There is no single reason for Sri Lanka’s glaring lack of non-bank financial innovation. Rather, it reflects an accumulation of interlocking problems. For one thing, it is tricky for foreigners to secure a work visa. According to Harvard University economist Ricardo Hausmann, the ratio of local workers to foreign workers in Sri Lanka is roughly 550 to 1. Compare that with the US, where the ratio is 12 to 1. Add in a long-standing brain drain, and the result is a dearth of highly skilled, educated and driven financial innovators.

Erratic or antiquated regulations do not help either.

When Crowdisland was launched to much fanfare in 2016, its aim was clear and unequivocal. Founded by Jeevan Gnanam, a director of Colombo-based boutique investment bank YSP Advisors, the firm aimed to match local entrepreneurs with angel investors around the world.

“Our focus is on helping startups become investor-ready,” says chief executive Chalinda Abeykoon.

Crowdisland certainly looked the part, down to its lively website and snappy corporate tagline, which urged people to do “great work” by loving what they do.

But its ambitions were hobbled virtually from day one, when it realized existing laws prevented it from acting as an online matchmaker. It was unable to execute payments, making it impossible for it to act as a capital conduit for foreign angels.

More worryingly, it was also technically illegal, thanks to a 1991 securities act that prevented private firms from inviting investments from the public, and a 2007 companies act limiting the number of shareholders in a private firm to just 50. Crowdisland does continue to work within and around legislation, but a proud boast of having raised $468,000 for local firms, still in pride of place on its website’s homepage, isn’t a sum to set the world alight.

Sri Lanka’s final problem stems from the fact that many of the island’s leading financial innovators lack the kind of monomaniacal drive one so often finds in the likes of Shenzhen, Singapore and Silicon Valley.

Take the example of Nuzhi Meyen, an easygoing IT consultant working for local conglomerate John Keells, who won an intra-company financial innovation competition and left a steady job to realize his dream.

Meyen’s idea was simple: he would set up a classic peer-to-peer lending operation that matched small-time borrowers with lenders.

There was a clear gap in the market: banks were reticent about disbursing micro-loans, in part due to an archaic 1918 law called the Money Lending Ordinance, twice amended but still active, which prohibited lenders from charging ‘unfair’ interest rates. Meyen checked with the regulator and found that he could charge up to 30% interest on loans disbursed via his platform. He raised SLR2 million, named his company Helios, and opened for business in early 2018.

When we meet in January 2019, Helios, despite being regularly touted as one of the country’s more exciting and ambitious P2P providers, remains very much a work in progress. Meyen is engaging but also candid about his firm’s diminutive scale.

In a little under 12 months, SLR1.5 million had been channelled to a handful of borrowers. By early March, when we talk again, that number had risen slightly, to SLR2 million.

“A guy needed SLR100,000 to restructure his credit card debts, and we had a woman borrow SLR50,000 to help pay for her wedding,” he says, when asked to identify a few notable customers. No one had defaulted yet but he admitted to “a few late payments”. An analytics model he built from scratch, drawing on information gleaned from the country’s Credit Information Bureau, ensured that roughly 40% of applicants were red-flagged and rebuffed.

But he is painfully aware of his firm’s limitations. Helios needs fresh capital from new equity investors and a concomitant surge in demand for its services in order to put it on a firmer financial footing.

Helios is run on a shoestring, its digital platform overseen by a friend who does the job part-time while finishing his PhD at Warwick University in the UK.

“We converse on Skype,” says Meyen.

He is talking to John Keells about injecting more money and participating in another innovation challenge, this time run by startup accelerator Venture Engine.

Meyen is correct when he says that many citizens “have short-term cash needs that aren’t being well-served by banks”.

But currently neither Helios nor the rest of the nascent P2P sector is capable of filling the gap.

Asked what is hobbling fintech in Sri Lanka, he points to a mix of outdated laws and a lack of support from a government that should see good disruption as a means to create jobs and improve rates of financial inclusion.

Perhaps Meyen’s time hasn’t quite come. Maybe 2019 will be the year P2P lending really takes off, and with it, his fortunes and those of his firm. And this could be the year that Sri Lanka’s well-run lenders are flooded with requests from millions of long-standing customers across over the country to make the painless and seamless transition over to digital. This could be the year that Sri Lanka goes from fintech laggard to leader.

Just don’t count on it.