The Rise of Virtual Banks: Disrupting Traditional Brick-and-Mortar Banking

Morara Lewis⃰

“Every day is a bank account, and time is our currency. No one is rich, no one is poor, we've got 24
hours each.” Christopher Rice

The financial services industry has undergone significant changes with the rise of technological
innovations in Fintech. These advancements present both opportunities and risks for consumers,
investors, and the overall stability of the financial system. 1 Financial regulation plays a crucial role in
managing these risks and ensuring the integrity of the financial sector. Fintech has the potential to drive
economic growth, reduce poverty, and promote financial inclusion and efficiency. 2 Recognizing the
implications of emerging technologies, financial authorities are adapting their policy frameworks and
offering guidance to navigate the evolving landscape of the financial sector. 3 Traditionally, banks have
relied on manual methods to collect and store customer information, maintaining hardcopy records. 4
However, with the advent of the digital era, banks have undergone a significant transformation,
transitioning to virtual data collection and storage practices. 5 In this new landscape, banks have shifted
their focus to ensuring the security of digital information, protecting their servers, and safeguarding
vast repositories of personal and sensitive data. 6 This shift reflects the changing dynamics of the
banking industry as it adapts to the challenges and opportunities presented by the digital age.7

The concern surrounding data storage has evolved, with a shift towards virtual storage methods. 8
Enterprises, including banks, now prioritize protecting themselves against large-scale cyber-attacks due
to the potentially catastrophic financial consequences.9 Furthermore, automation has revolutionized the
financial services sector, transforming various aspects of banking. Computerized tellers, digital record-
keeping, and electronic payment systems have replaced traditional methods, allowing transactions and
operations to be completed instantly with a simple click of a button. 10 These advancements have
brought convenience and efficiency to the industry, streamlining processes for both banks and
customers.

The advent of online banking through the internet has brought about a profound transformation in the
banking industry.11 Banks are now able to operate on a global scale by leveraging cloud technology,
allowing for seamless sharing of information across different locations and with individuals
worldwide.12 This digitization has significantly benefited banks, enabling customers to access their
accounts from any internet-enabled device. As a result, new financial hubs have emerged, facilitating

1
global business transactions with greater ease of access and connectivity. 13 With the rise of new banks
and financial institutions, there has been a corresponding expansion in the size of their infrastructures
and IT specialists.14 This growth has also led to a significant increase in the volume of data being
shared within the industry. However, along with these developments, there has been a surge in the
areas that are vulnerable to potential cyber-attacks.15 The expanding digital landscape has brought forth
new challenges and risks that need to be addressed in order to safeguard the security and integrity of
financial systems.16

On the downside, banks only had to worry about the security of their server rooms, but now security
has shifted to become an enterprise-wide concern. A vast amount of the data that financial industries
store is highly sensitive and can easily be shared internally and accessed by hackers, so security is
absolutely imperative in every aspect of the business. 17

With the recent technological advances, there has been a significant growth in digital lending in Kenya
with an annual digital lending market estimated in the range of Kenya Shillings Thirty-Nine to One
Hundred and Ninety-Five Billion.18 The rapid growth of digital money lending platforms can be
attributed to their accessibility, particularly for the unbanked population, and their convenience
compared to traditional banks.19 This trend has sparked discussions about whether these platforms are
gradually assuming the roles traditionally performed by banks and whether regulatory measures should
be in place, if they are not already, to govern their operations. 20 The emergence of these platforms
raises important considerations regarding consumer protection, fair lending practices, and the overall
stability of the financial system. The Banking sector is regulated by the Central Bank of Kenya. 21
However, with internet banking fast taking root, concerns abound as to whether the regulator can match
up. This, is mostly attributable to the mobile money lending platforms such as Tala, Branch which
remained unregulated until the amendment of the Central Bank of Kenya Act.22

In the new law the monetary authority i.e., the Central Bank of Kenya (CBK), has the power to regulate
the industry and take action on those that violate consumer privacy. 23 Some of the salient features of the
Amended act include the registration of digital credit providers. To facilitate the transition to the
regulatory ambit, CBK requested all existing digital credit providers to submit their business details by
January 21, 2022 (now past).24 The expansion of the digital credit industry brought about public
concerns regarding the costs, misuse of personal information, and unethical debt collection methods
employed by unregulated digital credit providers. In response to these concerns, the Data Protection
Act was enacted. The primary purpose of this act is to regulate the processing of personal data,

2
safeguard the rights of data subjects, and define the responsibilities of data controllers and processors.
Its implementation aims to address these issues and establish a framework for the proper handling and
protection of personal data in the digital credit sector.25

Despite previous unsuccessful attempts to regulate digital lending and address consumer risks, the
implementation of the Amendment Act represents a positive and welcomed step forward. 26
The
inclusion of licensing requirements and compliance with the Data Protection Act will foster
accountability among digital credit providers. However, the emergence of fintech developments
presents challenges that extend beyond the conventional purview of financial authorities, and the rapid
pace of innovation poses difficulties for regulators to respond promptly. Furthermore, there may be
trade-offs between different policy objectives that need careful consideration in this evolving
landscape.27

More needs to be done by key players in the financial sector to redefine the sector. For starters,
embracing technological integration where banks should prioritize the integration of AI and fintech
solutions into their existing systems.28 This includes adopting advanced analytics, machine learning
algorithms, and robotic process automation to enhance operational efficiency, customer experience, and
risk management.29 The fostering of collaboration where banks should collaborate with fintech startups
and technology companies to leverage their expertise and innovative solutions. This can be done
through partnerships, joint ventures, or investment in fintech firms. Collaboration enables banks to
access cutting-edge technologies and expand their service offerings.30

Much more can be done about the regulatory framework as well. The regulatory framework should be
updated to accommodate the evolving landscape of AI and fintech in the banking industry. Regulators
should strike a balance between fostering innovation and ensuring consumer protection, data privacy,
and cybersecurity.31 Clear guidelines and regulations can provide a conducive environment for the
responsible and ethical use of AI and fintech. 32 At the heart of this should be continuous learning and
adaptation as banks should foster a culture of continuous learning and adaptation to stay abreast of
emerging technologies and industry trends. This can be achieved through training programs, knowledge
sharing platforms, and collaboration with academia and research institutions.33

3
1
⃰ LLB (Kabarak University) Continuing.
Financial Stability Institute, Policy responses to fintech: a cross-country overview January 2020
<https://www.bis.org/fsi/publ/insights23.pdf> Accessed 8 June 2023.
2
Ibid.
3
Ellinger P.E., Lomnicka Z. Eva, and Hooley Richard, Ellinger's Modern Banking Law, 4th Edn, Oxford University Press
4
Ibid.
5
Supra note 1.
6
Williams Mark; Uncontrolled Risk: Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World
Financial System, McGraw Hill Professional, 2010.
7
Ellinger P.E., Lomnicka Z. Eva, and Hooley Richard, Ellinger's Modern Banking Law, 4th Edn, Oxford University Press
8
Bank Info Security, The 5 Essentials of Banking Security in Tough Times, <https://www.bankinfosecurity.com/5-
essentials-banking-security-in-tough-times-a-1074> Accessed on 8 June 2023.
9
Ibid.
10
Security Today, Banking Security, <https://securitytoday.com/articles/list/banking-security.aspx> Accessed on 8 June
2023.
11
Financial Stability Institute, Policy responses to fintech: a cross-country overview January 2020
<https://www.bis.org/fsi/publ/insights23.pdf> Accessed 8 June 2023.
12
Ibid.
13
Ibid.
14
FSD Kenya, Report on Digital Credit in Kenya 2019, <https://fsdkenya.org/wp-content/uploads/2020/07/Focus-Note-
Digital-Credit-in-Kenya_Updated.pdf > Accessed 8 June 2023.
15
Business and Human Rights Resource Center, Kenya: Rise in digital economy contributing to job losses especially in
banking sector, < https://www.business-humanrights.org/en/latest-news/kenya-rise-in-digital-economy-contributing-to-job-
losses-especially-in-banking-sector/ > Accessed 8 June 2023.
16
Ibid.
17
Security Magazine, Banking industry sees 1318% increase in ransomware attacks in 2021.
18
FSD Kenya, Report on Digital Credit in Kenya 2019, <https://fsdkenya.org/wp-content/uploads/2020/07/Focus-Note-
Digital-Credit-in-Kenya_Updated.pdf > Accessed 8 June 2023.
19
Central Bank of Kenya, Monetary Policy Committee Market Perceptions Survey Report July 2021
<https://www.centralbank.go.ke/uploads/market_perception_surveys/712089520_MPC%20Market%20Perceptions
%20Survey,%20July%202021.pdf&gt > Accessed 8 June 2023.
20
Central Bank of Kenya, Monetary Policy Committee Market Perceptions Survey Report July 2021
<https://www.centralbank.go.ke/uploads/market_perception_surveys/712089520_MPC%20Market%20Perceptions
%20Survey,%20July%202021.pdf&gt > Accessed 8 June 2023.
21
Central Bank of Kenya Act, S 4A,
22
The Central Bank of Kenya (Amendment) Act, 2021
23
Ibid.
24
KN Law LLP, The Central Bank of Kenya (Amendment) Act, 2021 <https://kn.co.ke/the-central-bank-of-kenya-
amendment-act-2021/> Accessed on 8 June 2023.
25
Data Protection Act, 2019
26
Central Bank of Kenya, Digital Credit Providers Regulations <https://www.centralbank.go.ke/2021/12/23/enactment-of-
the-law-to-regulate-digital-lenders-and-issuance-of-the-corresponding-draft-regulations-for-public-comment/> Accessed on
8 June 2023.
27
Ellinger P.E., Lomnicka Z. Eva, and Hooley Richard, Ellinger's Modern Banking Law, 4th Edn, Oxford University Press
28
Mario Bellia, Sara Maccaferri &amp; Sebastian Schich, ‘Limiting too-big-to-fail: market reactions to policy
announcements and actions’ < https://link.springer.com/article/10.1057/s41261-021-00176-y > Accessed
8 June 2023.
29
FSD Kenya, Report on Digital Credit in Kenya 2019, <https://fsdkenya.org/wp-content/uploads/2020/07/Focus-Note-
Digital-Credit-in-Kenya_Updated.pdf > Accessed 8 June 2023.
30
José Carlos Laguna de Paz, ‘Some implications of the new global digital economy for financial
regulation and supervision’ < https://link.springer.com/article/10.1057/s41261-022-00189-1 > Accessed 8 June 2023.
31
Chryssa Papathanassiou, ‘Fundamental rights and banking supervision’
< https://link.springer.com/article/10.1057/s41261-022-00204-5 > Accessed 8 June 2023.
32
David T. Llewellyn &amp;Tim Congdon, ‘Bank regulation: Has the regulation pendulum swung too
far?’ < https://link.springer.com/article/10.1057/s41261-022-00191-7 > Accessed on 8 June 2023.
33
Central Bank of Kenya, Digital Credit Providers Regulations <https://www.centralbank.go.ke/2021/12/23/enactment-of-
the-law-to-regulate-digital-lenders-and-issuance-of-the-corresponding-draft-regulations-for-public-comment/> Accessed 8
June 2023.