When a new technology emerges, established players in that sector are always faced with a big question: should they try to compete by adopting the new technology, or stick to what they know best.
The same quandary that now faces established banks stood before landline telecoms operators 15–20 years ago. In terms of fintech, it seems likely that the answer will become clear over the next few years, as different banks adopt different strategies.
The Bank of England’s Governor, Mark Carney, has warned that competition offered by fintech could reduce “the stability of funding of incumbent banks” and added: “The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society.”
While it can be difficult for mainstream banks to replicate the services offered by fintech operators at similarly low cost, mobile money firms can usually provide alternative versions of the products offered by traditional banks. For example, M-Pesa now allows customers to save for a specific purpose via its M-Shwari service, replicating similar savings accounts offered by high street banks that enable customers to buy a car, pay school fees or meet other specific outlays.
Global consultancy Accenture calculates that fintech threatens more than a third of traditional banks’ revenue. Due to the march of technological innovation and the emergence of more attractive investment regimes, the challenge posed by fintech is only likely to grow.
It is also important not to underestimate the impact of reduced red tape. The time needed to register a new company and patents is falling in the vast majority of African countries, making it easier to launch new businesses and products.
The CEO of cloud banking service Mambu, Eugene Danilkis, commented: “Africa is in the early but rapid phases of fintech development. Having started off on the payments side, it will move quickly and leapfrog to more complex financial services as smartphone penetration deepens. There is a big opportunity for extensive growth with a population of 1.2bn, which will double over the next 30 years.”
However, Dave van Niekerk, the CEO of MyBucks, said that it is “hard for traditional banks to change traditional operations” because it is not viable for them to offer accounts with very small balances to millions of people. He added: “In the very near future, the poorest of the poor will use technology to educate themselves and access financial products and services, anywhere and at any time.”
Attempts at integration
Fintech is not just a threat to established banks but also to other companies in the financial services sector. Visa, for instance, is built on technology developed during a previous financial technology revolution, and should be able to capitalise on the fintech boom.
It must therefore decide whether to defend its position or evolve in line with market trends. At the end of 2016 it launched its mobile payments solution mVisa in Nigeria in cooperation with Nigeria’s biggest banks. Customers are now able to pay for items by scanning QR codes on their smartphones or entering codes into non-smartphones.
Other attempts to integrate the two worlds include PayDunya, an online payments system that allows African e-businesses to accept payments from credit and debit cards, as well as mobile money wallets. Similarly, Yoco provides retailers with an integrated card acceptance and point-of-sale solution, incorporating a mobile app, and either wireless or plug-in card reader.
TheDirect Pay Online Group* – formarlly known as 3G Direct Pay Group – provides e-commerce solutions across Eastern and Southern Africa that accept mobile money, e-wallets and credit and debit cards. Similarly, mobile rewards platform TuYu is working with banks to reduce the proportion of customers that default on debt repayments. Monetary or voucher rewards are sent to customers’ mobiles in return for early repayments.
In common with their alternative competitors, mainstream banks have bought into Bitcoin in order to ensure that they do not miss out. An African version of Bitcoin but still based on blockchain technology, called Kobocoin, has been launched. Mobile wallet services incorporating blockchain technology, such as Bitsoko, have also been launched.
Other parts of the traditional financial services industry have sought to cooperate with fintech and mobile money. Paypal – if it can be described as part of the mainstream – has concluded a deal with M-Pesa that allows anyone with a credit or debit card to pay money into an M-Pesa account.
Of course, some fintech products are aimed at established financial services companies. At the end of May, US firm InvestCloud secured a contract to provide digital client communication and client reporting solutions for S Africa’s Anchor Private Clients, which has $3.6bn of assets under management.
The Head of Anchor Private Clients, Brendan Gace, said that his firm was impressed with InvestCloud’s easily customisable digital platform, which is using the Blue suite of financial apps. He added that the contract meant that Anchor “didn’t have to invest significant time and resources in building our own system, yet the result is exactly how we want it to be.”
Banks becoming incubators
Some established banks have sought to compete by becoming incubators for fintech. Standard Bank and Barclays have both launched startup support programmes, with the most successful companies taken under their wing at the end of their periods of support.
They calculate that they can encourage innovation by allowing these startups to remain independent until the point when they have proven themselves and can be brought into the company fold.
Tom Jackson, one of the founders of Disrupt Africa, said: “Fintech is clearly one of the most vibrant spaces within the African tech scene, and the investor community is alive to that. In addition, we have seen a host of independent and bank-led programmes and initiatives launched to support the development of fintech on the continent.”
The big drawback with such initiatives could be that they are regarded as an interesting sideshow rather than a core part of the business in question. In much the same way as corporate social responsibility (CSR) can be seen as an offshoot of the main business of any company, so too fintech can be regarded as an interesting diversion by company boards raised on traditional banking.
There could also be a tendency for banks to seek out startups that fit into their existing corporate, technological and business systems rather than opting for those that are genuinely revolutionary or disruptive. In addition, large, established banks tend to operate at a far slower pace than startups, so it can take many months for a product or approach to be sanctioned. Slicker competitors can move into that technological space in the meantime.
The Head of Digital Financial services at Kenya’s KCB Group, Edward Ndichu, said: “Fintech startups have significant advantages in how they are organised, with a refreshing perspective to solving existing friction in delivering financial services to consumers. For KCB, it is a model of attracting new ideas and innovation, and continuing to remain relevant all the while supporting entrepreneurs [as they] build great businesses.”
*Article was amended to reflect a change in company name.