The platitude: no man is an island, corroborates the assertion that neither banks nor financial technology startups (Fintechs) can leverage the full potentials of technology and innovations alone.
This is because they both have different areas of strengths and weaknesses. For instance, while banks have an institutionalized structure and large customer base, they are slow in adapting to ever-changing customer expectations. Fintechs, on the other hand, are nimble and innovative but often lack the experience and much-needed resources to upscale.
Thus, the summation of Ernst & Young’s 2018 report, titled, “Unleashing the power of FinTech in banking,” is instructive. The accounting firm said “unless banks and fintechs work together better, neither will reap the full benefits of innovation. They must partner, or they may perish.” Indeed, through meaningful collaboration, banks and fintechs will achieve much more than either of them will do alone, especially in view of current realities in the financial industry. PricewaterhouseCoopers (PwC), in its Global FinTech Survey, stated that a quarter of banks’ businesses, or more, is at risk of being lost to Fintechs within the next five years.
Barely a decade since the financial crisis that brought many financial institutions to their knees, another storm clouds are brewing. Global growth continues to vacillate - projected to ease at 2.9 per cent this year, amid trade tensions and financial market pressures, while the Nigerian economy is largely rudderless, more so with the re-election of President Muhammadu Buhari. Nigeria’s GDP grew by 2.38% in the fourth quarter of 2018. Additionally, the notable large technology companies in America and China, including, Google, Apple, Facebook and Amazon (GAFA), and Baidu, Alibaba and Tencent (BAT) are making inroads in providing financial services. For instance, Facebook has enabled financial services on its WhatsApp Business platform and is currently exploring blockchain and cryptocurrency possibilities. This is in addition to the existing Apple Pay, Google Pay, Alipay, WeChat and Amazon Pay.
As these technology companies further morph into ‘TechFins,’ they will be competing for a slice of the banks’ market share. It will be foolhardy for banks, and Fintechs, to disregard the threat they pose as financial services providers (TechFins) considering their pervasive and ubiquitous status. For instance, in Nigeria, the largest telecommunications company by the number of users, MTN, has announced plans to apply for mobile money licence and launch an instant messaging service. With over 60 million people subscribed to the MTN network in Nigeria alone, the launch of MTN Mobile Money and instant messaging service (akin to WeChat, perhaps a WeChat of Africa) poses a threat to banks.
With these handwritings on the wall, banks have embraced technology as a tool for optimizing costs and ensuring customer satisfaction to fortify their competitive advantage. They are also collaborating with both the fintechs and techfins. Recently, a foremost American bank, JP Morgan Chase, launched its own digital coin, called JPM Coin, based on blockchain technology to enable the instantaneous transfer of payments. Recently, Apple and Goldman Sachs announced plans to launch credit cards that will be integrated into iPhones. In Nigeria, we have seen banks partner with fintechs, sponsor or organize fintech-focused competitions (hackathons) and launched their own digital products in line with the technology trends in the banking sector. One of such trends is the digital-only bank (neobank).
In May 2017, Wema Bank launched Nigeria’s first fully digital-only bank, ALAT, raising the bar beyond the regular mobile application Nigerian banks were used to. Through the ALAT by WEMA app, customers can create a bank account in less than five minutes, as easy as creating a Facebook account, and carry out banking activities without stepping into a banking hall. In addition to other unconventional features, ALAT also introduced a 10% interest rates on savings and maintenance-fee-free debit cards. This appeals to millennials who are digital natives and has ensured the runaway success of ALAT - over 280,000 customers have been onboarded with more than N2.2 billion in deposits.
Another technology trend in the banking sector is the use of data analytics and artificial intelligence (AI). Using AI technology, banks are able to deploy intelligent assistants to deliver instant banking to customers. For instance, LEO and ADA - popular chat bankers launched by UBA and Diamond Bank, respectively, enable customers to open an account, transfer funds and pay bills via Facebook Messenger. With the launch of WhatsApp Business solution, other banks, notably, First Bank, Access Bank, GT Bank and UBA, launched WhatsApp Chat Banking in 2018. This allows customers to carry out transactions via WhatsApp. Generally, the use of AI empowers banks to deliver tailor-made services to customers. With customer intelligence, banks are able to give to customers what they really want, when they want it.
While there are fintechs who are competing with the banks for some of the most profitable elements of the financial services value chain, it is noteworthy that some are, in fact, dependent on banks for survival, as their primary customers are financial institutions. For instance, Flutterwave, Interswitch, TeamApt and Paystack are essentially switching agents that facilitate payments among buyers, sellers and financial institutions. As such, they have a natural symbiotic relationship with banks. In dealing with the competing Fintechs, however, banks are cultivating a relationship with the tech community, particularly the fintech space.
In July 2018, First Bank of Nigeria launched a Digital Lab. Located in “Yabacon Valley” - Nigeria’s adaptation of Silicon Valley, the Digital Lab functions as both a hub and workspace, providing a platform for FirstBank to collaborate with Fintechs and contribute to the development of technology in Nigeria. Later in October 2018, FirstBank held a two-day hackathon as part of the second edition of its Fintech Summit (Fintech 2.0 Summit). The hackathon was primarily designed to identify talents and innovative solutions to the challenges of the financial industry through the use of AI and Big Data. Earlier this year, in February, FCMB also launched Hub One, a tech-focused co-working space in Yaba, Lagos (Yabacon Valley). Hub One is expected to host several incubation programmes and hackathons to support tech start-ups. Other banks, like Union Bank, have launched solutions geared towards tech startups. Launched at TechPoint Build - Nigeria’s premier technology conference - in January, Union Bank’s Tech Ventures is designed to support emerging technology companies through their lifecycle, from idea to growth stage.
Conclusively, there is a sense that 2019 is a critical year in the evolution of the financial industry. With the foray of TechFins and as more Fintechs continue to provide financial services, the maxim: “banking is necessary, but banks are not” has begun to manifest. Banks must, indeed, partner with fintechs to help preserve their market share, especially their slice of the financially excluded-cake (up to 40 million Nigerians are unbanked). Perhaps, they could forge ahead beyond partnerships and consider acquisitions.