Fintech startups are taking out a significant portion of consumer banking transactions — payments, savings, lending and reliance on cryptocurrencies to build trust among customers.

Across Africa, fintech startups are rapidly disrupting traditional banking by innovating consumer financial services and creating digital systems and infrastructure.

Since 2015, more than 270 firms have raised about 900 million dollars across the continent. Flutterwave, African focused payment startup, raised $170 million earlier this year. Recently, Opay became the continent’s latest fintech unicorn after being valued at over $2 billion.

Despite the Covid-19 pandemic, the African fintech ecosystem has remained prime to investors and several African entrepreneurs are joining the buzz of creating convenient solutions for the continent’s increasingly populous consumers. Whether these technologies would replace banks is a big fuzz among investors and entrepreneurs globally.

What are the core aspects of banking?

Banking is a highly diversified industry. Banks categorize into retail, commercial, investment, cooperative, credit unions, savings and loans firms — referred to as Thrifts. Despite the wide variance of financial services provided by banking institutions, the following services are typical to consumers and investors: lending, foreign currency exchange, consultancy, insurance, investments — managing securities between companies and investors, bank guarantees, remittance of funds, credit & debit cards, ATM services, mobile banking, private banking.

Which aspects of banking are Fintech Startups adopting?

Fintech firms currently provide all the core elements of consumer banking: lending, personal finance, remittances, consulting, insurance, foreign currency exchange, among others (not without the support of traditional banking ledgers). The likes of corporate investments and corporate consultancy remains an area undisrupted by the surge of digital alternatives. Nigeria’s Opay and Flutterwave, Kenya’s M-Pesa, South Africa’s MyBucks, Egypt’s Fawry, and Ghana’s Zeepay have attracted millions of consumers who are actively switching to doing business with fintech startups.

How do banks implement financial technologies?

Banks have been laden with numerous regulations across the African continent. Recently, Ghana closed down 72% of its microfinance institutions, introducing stringent regulations to be met by banks. Similarly, in Nigeria, the government launched the new Banks and Other Financial Institutions Act (BOFIA 2020) to strongly regulate banking transactions within the country.

Banks have the opportunity to launch online banking services. Despite this added advantage, these digital solutions remain within the regulatory fixtures, eventually digitizing regulatory risk management. This method of creating digital banking solutions is rather termed RegTech and helps banks retain higher profitability as compared to the rapid dominance of Fintech. So can fintech firms outgrow and eventually replace banks?

Fintechs vs Traditional Banks

The advantage of fintech firms is the creation of innovative, convenient, and cost effective solutions. Fintech startups provide unparalleled convenience for consumers without long queues in retail banking halls or ‘unavailable service hours’. However, the core element of excellent financial services is consumer trust in the safety and security of their capital. Banks have decades worth of experience in managing consumer capital.

This trust cannot be replaced by the ardent eruption of a three-year-old fintech startup that is providing users with ‘above heaven’ banking consumer experiences. Yet, the swift adoption of technology among Africa’s youthful population poses a significant question about where consumer trust would shift to decades from now.

Currently, fintech startups are building on the back of banks through partnerships. The co-reliance provides banks with the opportunity to gain insight into digital solutions, allowing fintech startups to build consumer trust through their relationship with these banks.

The codependency also provides banks with ample time to replace legacy systems with modern infrastructure. Banks can focus on launching front-end, easy, and interactive applications to retain their market presence. Banks can also rely on the acquisition of fintech startups and frequent assembly of in-house technical talent to provide viable digital solutions for consumers.

Fintech startups face higher cybersecurity risks in a fast pacing digital world. The frequency of cyberattacks on fintech firms further drains down consumer trust. With concerns of privacy data and “conversion of conspicuous cash to invisible tokens known as digital money”, unschooled consumers are worried about the safety of their capital.