Banks have been slow to evolve, and that has created an opportunity for fintech start-ups to take up a slice of their market share.
By Tullah Stephen
Now more than ever, fintech start-ups have been seen as disrupting the financial industry, making banks shake in their boots. The last couple of years, a remarkable growth has been recorded in the fintech space. Many industry observers have foreseen that the technological superiority of fintech will topple established banks.
Fintech start-ups, are building new business models geared towards generating revenue opportunities. They are now providing the same services as banks though in a different and unbundled way. These start-ups are investing in areas such as credit scoring, risk solutions as well as personal financial management among others. Others are looking at revolutionizing the lives of consumers especially on how they purchase goods, manage savings and obtain loans. This has possibility to reduce banks to just utilities in the consumer journey. Consumers will not hesitate to use services designed to meet their needs.
Banks have been the mainstay of most economies and count for large sales and customer service. Their outmoded heritage systems hamper them from coming anywhere closer to where their digital rivals’ fintech start-ups are. The matter is crucial as banks profits are at a risk.
While this continues, recent studies have shown that higher levels of investment have been made in fintech space year-on year. Total African fintech investment is reported to have increased by a compound annual growth rate of over 58 per cent between 2014 and 2016, to $800 million (from $200 million), according to the PWC Fintech Survey 2017.
So does the rise of fintech signify the death of banks?
Jeremy Awori, the CEO of Barclays Bank of Kenya says, the debate over whether it is the end of the road for banks has been exaggerated. “Collaboration and coexistence should the key words in the discussion rather than replacement or extinction.”
Banks and fintech start-ups, according to Awori, are more friends than foes. Banks are looking at fintech as alternative way to drive change in the financial sector.
“What has always been overlooked has been the fact that Fintech’s advancement heavily relies on the financial sectors. Corporation from financial institutions have helped ensure the success of some of the innovations we are seeing from fintech.”
Jeremy Awori, CEO, Barclays Bank Kenya
Barclays Bank is among the increasing number of banks focusing on creating a global community for fintech innovation. The bank currently runs an accelerator programs for fintech start-ups supporting their innovations.
“Fintech firms can offer better technology that can benefit both banks and customers. On the other hand, some of these fintech companies lack experience, knowledge and clout that banks have in the financial sector. This means that there is a huge potential for these two institutions to benefit from collaboration.”
Recently Barclays Bank joined the fray of a growing instant mobile lending apps after it launched Timiza. The service allows customers to pay utilities, save money and procure micro-insurance as well as pay for cabs services.
A number of banking groups led by Barclays Banks and Citi group are setting up incubators for fintech start-ups. The incubators, are meant to give banks stake in businesses they will compete with. In addition the hubs give banks first-hand look and experience of how fintech operates and how they innovate.
Peter Muraya the CEO of Okolea International Limited, a Nairobi based fintech, says lack of innovation by banks is what fintech companies are cashing on. Mr Muraya says the door for fintech to come into the financial sector was wide opening at the point where banks overlooked customer needs.
“People want better ways to make payments, get paid, borrow and manage their money. Compared to fintech firms, banks have been slower to keep with the customer demands.” Fintech are exclusively digital and free from constraints of legacy systems and high overhead costs meaning they can offer services at competitive prices.
Fintech, unlike banks have had the advantage of being free of legacy technology systems and tough regulation which have often limited the digital developments of established financial service firms. Whereas regulators can easily regulate over banks, for fintech it can be challenging. Fintech are structured differently and questions have often been asked as to how fintech are regulated.
Maurice Otieno, the managing director at Metta, a global entrepreneurship ecosystem backed by Nest that works closely with fintech start-ups, says it’s too early to assume that it’s the death of banks.
Fintech start-ups have certainly disrupted banks operations especially for the ‘marginalized clients.’ These are the people at the bottom of the pyramid who banks have overlooked over time.”
With the emergence of technology such as block chain we see banks a little worried. These technologies are easier to use and are using a common trusted ledger to manage finances especially for groups such as chamas. Start-ups are winning over such consumer segments that the banks have neglected for a while.
According to Maurice, banks have woken up to the fact that they have to innovate as fast as fintech do. Banks need to balance the best of both worlds making the most of the advantages while ensuring they catch up with speedy evolution of fintech start-ups. Banks also need to get rid of silo structures within industry if they at all are to achieve any meaningful progress.
A report by Ernest Young (EY) dubbed Unleashing the Potential of Fintech in Banking, points out that collaborating instead of competing can offer fresh solutions for banks. “Shared services and knowledge will improve product offering through data analytics tools like predictive analytics offering deeper engagements with customers,”
Otieno says start-ups mostly overlay their functions on top of what the banks are doing already and start-ups need the banks for the foreseeable future. However, he points out that if banks do not adapt, start-ups might take up some of their functions especially know your client (KYC) and customers service areas as well as and micro-lending. This has been evident with some of the start-ups such as branch, Shika and Tala doing already.
For banks, Otieno says the actual call to action in this case is solving the consumer challenges in a new way. This requires a mind shift in the way they design their product and services. This will require them leveraging on technology to accelerate the change.”
Supporting Otieno’s sentiments, Mr Awori says working with start-ups positions banks as more innovative. The partnerships he added, gives value to banks as solutions are often designed operational excellence. Banks in the end can reduce structural costs and enable an enhanced regulatory compliance.
Fintech companies may struggle to reach critical mass before they run out of capital. For them to continue lending service they will need access to capital. For fintech start-ups, collaboration with banks will provide access to funds for future growth. Businesses are likely to remain scalable in the long term.
“Ultimately, the biggest winner in the collaboration are the consumers. More collaboration will not only enable faster and simple services but also offer new opportunities to improve the way people approach personal finance.”
