Friend or Fiend: Why Banks And Fintechs Need Each Other

FinTechs

In the last decade alone, Banks have come through the global financial crisis, the great recession and a radically changed regulatory environment. All this time, disruptive technologies have been challenging the traditional financial service providers like never before.

Financial Technology (FinTech) start-ups are playing an ever-increasing role in shaping the landscape of the financial sector. But should the emergence of FinTech really pose a threat to traditional banking? FinTech is an industry composed of companies that use new technology and innovation to deliver of financial services.

Should Banks Fear Fintechs?

Only recently, the Central Bank of Nigeria (CBN) has identified the rising influence of FinTechs in delivering financial services to consumers as a big threat to banking. CBN Governor Godwin Emefiele stated this in Lagos during the Chartered Institute of Bankers of Nigeria (CIBN) investiture of Uche Olowu as its 20th President/Chairman Council. FinTech, and particularly the global spread of mobile phones, has facilitated access to financial services by hard-to-reach populations and small businesses at low cost and risk.

Emefiele said: “Banking has a common threat. The enterprise risk posed by FinTech is real and there is need to be at the forefront of sensitising the banking sector about the real threats posed by FinTech.” To further buttress this point, a 2015 Goldman Sachs report estimated that $4.7 trillion out of $13.7 trillion in traditional financial services revenue was at risk due to new FinTech entrants in the lending, wealth management and payments space.

Why Banks should be worried about ‘platform companies’?

Contrary to widespread opinion, the biggest threat for the banking sector is not FinTechs, but non-banking companies such as Amazon and Alibaba, a recent report by McKinsey has stated. The study refers to these companies as “platform companies” and calls them the “new heavyweight competitor(s) in town,” for the banking sector.

Based on information gathered from McKinsey’s Panorama FinTech database, which tracks more than 1,000 financial start-ups, the payments area is the fastest growing segment in which these “platform companies” are taking over. One example is Alibaba. The e-commerce giant is essentially a payments company, the report suggests.

Additionally, it provides services in B2B (Business-to-Business), ride-hailing, lending, and asset management. “Such companies are blurring traditional industry boundaries,” the report says. “With their superior customer experience, they can sell an ever-wider range of products to their loyal customers.

Partners or Competitors?

Against this backdrop, many banks strongly believe that Fintechs are competitors that will ultimately take a large slice of the financial services ‘cake’. According to a new report by Oracle entitled, ‘Digital Transformation: The Challenges and Opportunities Facing Banks’, many lenders are of the view that customers might prefer the solutions provided by Fintechs because they are able to move more rapidly than financial institutions can at the moment.

As a result, Banks could lose the customer relationship on the Internet to the Fintechs. However, customers, in the medium term, will want to keep their accounts with a Bank because trust is a very important issue to them.

Although Fintechs have competition in their DNA and always in search of gaps in the banking system to exploit, there is no rule that says they cannot be collaborators with mainstream banks. The fintech companies have the advantage in terms of speed, agility, and the capacity to understand and quickly build a very good user experience.

 However, they don’t have the legacies that banks have and they have a completely different mindset – and with the lack of scale and trust, it’s not as easy as it might seem for Fintechs to move forward without banks. Fintechs, it should be noted arose as a result of huge gaps in the banking ecosystem.

In Nigeria for instance, in March 2017, the Central Bank of Nigeria (CBN) stated that it has only linked 30 million Bank Verification Numbers to several bank accounts. The Nigerian Inter-Bank Settlement System (NIBSS) reported 66.6 million active accounts. Going by CBN data, only 30 million bank accounts exist presently in a country of about 180 million people.

Competition

Banks may be too big to pay particular attention to individual customers but that is an area FinTechs are thriving. FinTechs can help banks regain the trust. Some banks are looking at a future where 90 percent of its services would be outsourced to customers’ mobile phones.

Much of that is likely to be achieved by its in-house FinTech team in collaboration with other FinTech startups. “Mainstream financial institutions are rapidly embracing the disruptive nature of FinTech and forging partnerships in efforts to sharpen operational efficiency and respond to customer demands for more innovative services,” said PwC in its latest Global FinTech.

Nigerian Banks are making significant efforts to bank the unbanked, using technology solutions that are flexible and customer friendly. Some Banks have introduced a Quick Response Code (QR Code). It is a machine-readable code, consisting of features used for storing readable information that could be captured and interpreted by the camera on a smartphone device. With this technology, customers can make digital payment across all channels, relatively easy. 

Conclusion

Undoubtedly, there is an urgent need for Banks to explore areas of partnership with disruptive financial innovators like FinTech companies. Industry analysts are of the view that FinTech startups will disrupt 25 - 30 percent of the banking system’s value chain. However, instead of sending the whole banking reality into utter chaos, banks and FinTech companies must find real ground for cooperation.

Therefore, the question is not if these new disruptions will transform banking as they have already started doing so, but rather how to partner more successfully within the new financial ecosystem. To this end, Nigerian Banks should build their strategy around partnership rather than competition.