The evolution of financial technology (fintech) innovations in Africa is not in a vacuum. It is on the back of a historical financial service industry with tried and tested, regulated, and developed service providers – traditional banks that have provided financial services in various forms over time.
The need to encourage new financial innovations in the bid to drive financial access and inclusion so as to reduce the cost of financial services, and enable speed and convenience for consumers, among others, cannot be a call for competition that seeks to replace traditional banks with fintech companies. Rather, the enormous benefits of both ends must be harnessed in a collaborative manner to drive greater benefits for consumers and financial service providers while facilitating the ease of regulation, compliance, and supervision by central banks.
Therefore, the purpose of this article is to discuss how the challenges of both traditional banks and fintech companies can be compensated through the recommended forms of collaboration.
We are all familiar with traditional banks, their services, and products and possibly we are customers of one or more of these banks. Hence, the focus of the discussion is not to explain what traditional banks do and how they do them but what advantages or leverages they have gained over the years performing their regulated roles.
Commercial banks (as we call them) have evolved from small operations, merged, or acquired others to become formidable financial service providers – some at regional and continental levels. In the process, they have gained the following advantages which make them indispensable partners in the provision of financial services going forward despite the disruptive nature of fintech innovations.
- History and Heritage (H&H) – on average, traditional banks across Africa have more than a decade-plus history of operations and have developed into leading brands focused on various segments of the financial services industry. Some traditional banks are centuries old and have established presence and operations – directly or through partnerships across various countries on the continent.
The long period of operations (the stability and certainty of operations) cannot be taken for granted. It is proof of the growth of sustained operations in a regulated environment, which will count for something in terms of consumer trust, consumer confidence, brand equity, and operational resilience. These can be leveraged to drive acceptability and consumer trust in new collaborative innovations between traditional banks and fintech companies – as fintech companies are new and without such history and heritage.
- People – people are central to the operations of traditional banks. The staff list of these banks includes persons with competence in customer service, investment advisory, operational management, treasury, risk and compliance, and people management among others.
These are personnel who were recruited based on specific and specialized skill sets, trained over time to enhance their competencies, and have become the brains for the sustained profitable operations of traditional banks across the continent.
Their understanding of the development, operationalization, and review of financial services, compliance, risk, customer service, product development, etc. cannot be discounted as they are opportunities for leverage to drive new innovations in the financial service industries. Demonstrably, traditional banks have evolved by themselves through history – from cheques, atm services, online banking, etc. using their people no matter how slow their response to innovations has been.
Therefore, traditional banks have a pool of qualified and competent personnel with a precise understanding of the demands of regulations, compliance, product development, etc. of the financial service industry which is imperative for any successful deployment of financial innovations. At worse, traditional banks have the financial capabilities to recruit, train and retain personnel in response to the emerging demands of the provision of financial services and will be of enormous benefit to any collaboration with fintech companies.
- Business – traditional banks have known lines of business – viable business models. They have evolved from ideas to licensed operations with verifiable services and products. Not only have they been licensed, but they have also demonstrated compliance with the dictates of their licenses and have remained in operations, undertaking expansion projects, opening new branches, and offering new products and services over time.
Visibly, consumers are able to undertake financial services with these banks. There is no way to describe this than to say traditional banks are in business and have “business”- and of course, profitable ones over time. Quite differently, some fintech companies are still ideas or early-stage businesses with no viable business model. To compete with established businesses such as traditional banks will mean huge investments by fintech companies which are strained due to the current global economic crisis.
- Customers – traditional banks provide services for end users – customers. Over the years, traditional banks have recruited millions of active customers and continue to develop initiatives to recruit new ones for their various products and services.
The service offerings to these customers have enabled profitability for the traditional banks and offer the opportunity for the development of innovative products based on the existing relationships.
There are product/service limitations in the existing bank-customer relationships due to the dominance of some financial services such as savings and withdrawals, loans, etc., and the absence of new innovations that are been driven by fintech companies. Opportunities, therefore, exist for traditional bank-fintech collaboration which leverages insights from existing customer relationships of banks to develop new products or services which can be made available instantly to millions of customers. Such collaborations will reduce the customer acquisition cost of fintech innovations and promote greater market penetration and adoptions.
- Systems – traditional banks have and continue to make huge investments in systems, processes, and information technology (IT) infrastructures to support their operations. Some of these investments are in fulfillment of the regulatory requirements for licensing and operationalization of the banks.
The associated cost of such investments to ensure a 24-hr availability of financial platforms, protection against fraud, cyberattacks, and breaches of customer data, improvements in service offerings, and adaptation of technological advancements, among others, are costs that fintech companies cannot undertake – thereby limiting their ability to procure independent licenses and operate in line with regulatory demands.
These legacy investments and the ability of traditional banks to procure new and advanced IT infrastructures, secure required certifications, and maintain compliance are tools that can be leveraged fully through some form of collaboration with fintech companies that are in dire need of these investments.
FINANCIAL TECHNOLOGY (FINTECH) COMPANIES
Across Africa, new companies are emerging and driving financial innovations to enable greater access and inclusion for customers through the platforms of internet-connected devices or feature phones. These companies are unbundling traditional financial services and offering same to customers – individuals, merchants, businesses, etc. with the assured benefits of speed, convenience, and reduced cost.
To some, fintech companies present not only a challenge for regulation but also greater competition for traditional financial service offerings due to their evolution on the back of advanced technologies such as blockchain and therefore have greater potential to disrupt the established financial sector. Despite the associated challenges, the emergence of fintech innovations presents some advantages which existing financial service providers can harness to improve service offerings in the new technological era.
- Technology and Innovation – What is enabling disruptive innovations in the financial services sector is technology. Today, the advances in technology in the form of blockchain, artificial intelligence (AI), machine learning, etc. have opened wide the doors of possibilities for new ways of service across many industries including finance.
The net effect is that fintech companies are leveraging these advances in technology to develop new products and services in payments, savings, lending/credit, remittances, crowdfunding, and investments among others. In most instances where they are offered independently, these products have been shown to compete with services offered by traditional banks. In Africa, a good example of such competition is mobile money services with enabled wallets which allow customers to keep and maintain floats, withdraw, send money, and perform other services on their mobile phones without visiting a branch of a bank.
Currently, the greatest threat of innovations by fintech companies is the attempt to democratize the use of money as a store of value or medium of exchange – through the use of crypto-currencies. This is a demonstration of the possibilities that have been enabled by technology and has the potential to fundamentally change the way money (fiat) has historically been stored and used as a financial tool.
The best approach to dealing with the threat is not to imagine the limitations of technology and its impact on the financial service industry. Rather, its benefits and potential should be leveraged in a collaborative manner by existing players in ways that foster regulated use and promote greater access to financial services by all.
- Speed – Fintech companies are credited with “speed” in terms of product or service development and deployment. This is made possible by the lack of bureaucracy which is a key feature of the operations of traditional banks. The response time of fintech companies is quicker and facilitated by the strong desire to gain market advantage as new businesses.
Fintech companies are able to innovate at greater speed, with greater efficiency and technology which means they are able to respond to the emerging needs of customers in real-time.
The benefits of this attribute can be useful to fast-track the development time frames of innovations by traditional banks and make them responsive to the changing financial landscape should collaborations be forged.
- Cost of operation – fintech innovations have proven to be less costly to run despite the investment outlay required for the licensing and operationalization of such innovations. The heavy reliance on technology coupled with the benefits of reduction in operational cost has significantly made fintech operations less expensive compared to the establishment of physical infrastructure, etc. as associated with operating traditional banks.
The trade-off ensures investments into IT infrastructure and systems with the attendant benefits of improved service offerings and customer experience. The cost of operation, therefore, is less expensive compared with the huge cost of running traditional banks.
The advantage of collaboration will be to leverage both ends and ensure the provision of financial services in the most cost-efficient manner.
- Potential Reach – Financial innovations by fintech companies have the potential of reaching a wider customer base and achieving a higher market penetration. An example is the adoption and penetration rates of Mobile Money innovations across Africa. The high financial inclusion rates recorded by many African countries is/was made possible by Mobile Money innovations.
The mode of delivery of financial innovations by fintech companies makes them easier to penetrate markets and reach a wider customer base. These innovations do not require “brick and mortar” facilities to become functional. With an internet-enabled device or feature phone, a customer anywhere can access these services and perform financial services.
Although traditional banks have gained a considerably high number of customers, these customers may be the target of innovations being developed by fintech companies. Therefore, there is a need to consolidate and expand reach through collaboration with fintech innovators so as not to lose customers over time.
- Youthful innovators – the brains behind emerging financial innovations are young people and this trend is going to continue. Young people are taking advantage of technology, and insights to develop amazing new products and services that address pain points for consumers – either at the individual, merchant, or business levels.
The understanding of the problems underlying these innovations is remarkable. And with greater participation of young people in the financial service sector either as entrepreneurs or users of services or products, fintech innovators have a greater advantage of building products from personalized perspectives and insights – which ultimately addresses problems for the teeming youth of the African continent.
A partnership by traditional banks will enable access to these insights, energies, and understanding of these young innovators in championing relevant financial innovations.
THE NEED FOR COLLABORATION AND PARTNERSHIPS
The call for collaboration and partnership between traditional banks and fintech companies across Africa is not a call for them to abandon their strategies in search of collaborative market efforts. It is to prompt the consideration of leveraging synergies where appropriate to drive greater benefits, reduced the cost of operations, and promote financial stability, access, and inclusion across the continent.
Each player has compelling advantages for greater efficiency and effectiveness in delivering financial services in a regulated manner and the following recommended modes of collaboration and partnerships can be explored.
- Joint projects – traditional banks and fintech companies can constitute joint project teams with specific scopes of reference and support to design co-branded products or services with mutual ownerships of ensuing intellectual property assets.
- Out-sourcing – fintech companies may have the skills and competence to develop new innovations that traditional banks require. Instead of outsourcing to primary software or technology development companies, traditional banks can outsource innovations to fintech companies with a better understanding of the financial services industry.
- Innovation sandboxes and incubation – there is a growing interest by traditional banks to facilitate and run innovation sandboxes which grant fintech companies access to their platforms to test and innovate new solutions. This should be encouraged on a scale to promote new innovations based on identified gaps and run in partnership with other industry stakeholders.
This recommended innovation and incubator model should be pursued differently from regulatory sandboxes which seek to pilot and test already developed innovations (without an existing licensed regime) prior to regulatory approvals.
- Whitelabelling – under various partnership arrangements, traditional banks could adopt innovations by fintech companies and run with them.
Technology is changing the financial services landscape across Africa and creating new players – fintech companies with competitive advantages to compete with and in some instances outcompete traditional banks. However, because of the significant importance of traditional banks to the financial sector, deliberate attempts must be made to drive collaboration between emerging fintech companies and traditional banks with the aim to protect the integrity, gains, and stability of the sector while driving greater financial inclusion. And this article discusses some points of leverage and partnerships.
Richard Nunekpeku is the Managing Partner of Sustineri Attorneys PRUC. He also heads the firm’s Start-ups, Fintech, and Innovations Practice divisions. He welcomes views on this article and is reachable at email@example.com.
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