Whether the banking public likes it or not, the lines of Financial Services industry are being redrawn by Financial Technology (FinTech). CHIMA NWOKOJI in this report, assesses traditional banking in an era of FinTech- propelled disruptions, and continued rise in new business models.
FinTech companies and financial innovation are changing the competitive landscape of financial intermediation in such a way that every commercial bank knows what services to upgrade, because customers are already carrying out such transactions with FinTech companies.
Commercial banks are financial intermediaries that take money from people looking to save (deposits) and give to people looking to borrow (loans). They generate interest on loans, collect fees and commissions on numerous value added services rendered to depositors.
For example, banks do money transfers, give loans and advances, foreign exchange transactions, and bill payments.
A significant portion of their revenues come from these, either as net interest income; the difference between interest accrued and interest paid out or others. Today, some of these income streams are reducing as technology wrestles banking services from financial institutions and creatively destroying traditional banking.
Creative destruction as implied here is a development economics term which entails a process through which something new brings about the death and replacement of whatever existed before it.
These notwithstanding, there is consensus opinion that greater threat from Fintech on the banks’ operations will come in the medium to long term.
Nigeria, according KPMG advisory services, is anticipated to grow the FinTech industry to well over $45 billion.
Traditional retail banks are facing structural vulnerability issues like declining deposits due to multiple alternative investment options and the lack of innovation around products and services. In fact, some Fintech firms have started targeting the deposit and loans segments.
For example, PiggyBank, which uses recurring card payments to allow users create and fund a savings account on mobile phone, has proven popular among working class Nigerian youths. It offers an alternative to traditional fixed deposit account which requires a number of visits to a physical branch to set up.
One can request for a loan from ‘Pay later’ and receive a credit alert in two hours. One can also get a new dollar debit card from ‘Get Barter’ and open a fixed deposit account from PiggyBank. In short FinTech platforms offer customers superior service, at a lower cost through the efficiencies of technology.
Banks thus no longer have the comfort of time. The challenge is not one that will materialise in the distant future. Waiting and continuing business as usual is already causing most banks to scramble for other sources of revenue. If there has ever been a time for great strategy, then, for banks, it is now.
Need to be forward looking
Traditional bankers should realise that the much talked about challenges facing the industry is not a mere tech dystopia, but a reality. Only forward-looking lenders will survive the onslaught.
Reinforcing this view, the President, Chartered Institute of Bankers of Nigeria (CIBN), Mr Olusegun Ajibola at the World Conference of Banking Institutes (WCBI), in Nigeria, said, “Although the future of banking remains speculative, there are clear indications and a general consensus that a number of factors would continue to disrupt some already established banking models.”
Bankers should therefore realise that the rules of the road apply to banks as well. Always look what is coming ahead otherwise you will be run over. But there is always the temptation to only look at what’s there today and not use it to anticipate what is around the next corner. That is exactly why so many great companies were relegated and have fallen like a pack of cards.
Kodak (who invented digital photography but did not see the potential in it), is today lost in the market. Nokia looked at the iPhone but chose not to accept that the future of mobile phones was no longer hardware but software.
Some years back, Canadian multinational company, BlackBerry Limited, held sway in Nigeria and Africa with its range of mobile devices.
Wikipedia confirmed that at its peak in September 2013, there were 85 million BlackBerry subscribers worldwide.
BlackBerry has since lost its dominant position in the market due to the success of the Android and iOS platforms; the same 85 million had fallen to 23 million in March 2016.
For banks, this is a wakeup call. It means accepting that the notion of the so called GAFA banks (Google, Amazon, Facebook, Apple) is a very real one. Disruptions from open banking, Artificial Intelligence and Blockchain technology are set to quicken the creative destruction process of traditional banking. In fact, it is already a reality today.
According to Ajibola, due to increased competition from non-traditional banking competitors such as FinTech, increased specialisation to serve specific customers’ needs with speed, reduced need for face-to-face interactions between bank customers and the banks as well as availability of digital currencies, the future of banking job is uncertain.
The GAFA challenge
There has been ample speculation among experts when these tech giants might enter banking, as well as a great deal interest in the matter from a broader audience for many years now. 2017, however, was the year where the actions of Google, Amazon, Facebook and Apple spoke a lot louder than any words or expert analyses could. Google, Amazon, Facebook and Apple are set to become the largest banking providers without needing a cent worth of balance sheet.
Google, Amazon, Facebook and Apple do want to enter banking, but they don’t want to become banks. They target the revenue rich parts of the banking value chain while leaving the regulatory heavy parts with incumbent banks. “Why take the whole pie if you can cherry pick?” As McKinsey recently pointed out, with this strategy the non-banking challengers like GAFA has put up to 65 per cent of banks’ revenues at risk as well as 20 per cent of Return on Equity (ROE).
Banks offer only banking. Google, Amazon, Facebook and Apple on the other hand are building ecosystems for customers’ entire life. This convenience factor is why they are attracting so many people. This is also why over the past 10 years the tables have turned in the market. What we see today is a complete inversion of the past, with Google, Amazon, Facebook and Apple being worth more than any bank in the world.
Google financial advisory services
Google launched a revamped “Google Finance” tab directly in Google Search. It provides people financial information based on their interest, as well as additional insights linked to individual stocks, local markets or world markets and alters people to relevant market movements. In short, it provides the insights retail and affluent clients would otherwise get from their bank. Oddly enough, Google is the last one in the lineup to make its proper move on banking, beyond its already existing play in the payments space with Google Wallet and Android Pay.
This is a challenge to traditional banking because this kind of financial advisory function is part of the fee-based elements of the banking value chain. Contrary to transactional and custody functions, this is where the future of banking lies, as clients value such services most and their willingness to pay for such offerings is highest.
The challenge of Amazon lending
The second of the GAFAs, Amazon, is betting big on lending as its main beachhead for disrupting finance. Mid of 2017 it revealed that the small business lending arm it launched quietly in 2011 had surpassed the $3 billion mark and was accelerating its pace significantly, having added $1 billion of new loans in the preceding 12 months alone. Amazon’s second line of attack is payments. Amazon Pay, which has recently been added to the Echo’s/Alexa’s skill set, is set to receive a major boost by tapping into the market of voice payments. This is a market projected to have about 78 billion users by 2022 in the US alone.
The challenge of Apple payments
Nigerian Tribune findings reveal that Apple is, of course, the biggest force reshaping banking from the payment side of the value chain. Having sold more than 200 million iPhones per year for the last three years running, it has a vast user base and is growing its payments business accordingly. Apple pay now has an estimated 86 million users up from only 15 million in 2015, a staggering 473 per cent increase. Since December 2017, Apple also enabled payments directly via its messenger which is built into every one of its iPhones. If history is any judge, users will follow convenience and with nothing being easier than paying people through the device you handle permanently in any case, Apple Pay figures are in line for new heights in 2018.
Facebook’s e-money
Next to Google and Amazon, Facebook will perhaps turn out to be the biggest challenger to banks. It is fully embracing the notion of platform business. It is not creating new solutions itself, but partnering with others in a true ecosystem approach in order to bring new services to its 1.4 billion active daily users (yes, this is a user base larger than the population of China). Like Apple, Facebook sees its beachhead into banking in payments.
Facebook, Amazon, Alipay and others cut out banks in providing payment services. While Alipay is already popular for quick payments in China and heading for Europe, the Central Bank of Ireland not too long, added an unexpected company to its roster of digital payment providers — Facebook Payments International Limited. The licence it granted authorised Facebook to provide basic financial services, such as electronic money transfers, to all citizens of the EU. The social media giant already enables users to send money to each other in its Messenger app, and reportedly will soon add remittances to businesses.
The challenge of open banking
Another challenge to traditional banking is better illustrated using Mrs Lawrence Edet’s valuable financial data which is in custody of her bank, as their customer. A loan provider would be keen to know exactly when she enters into the red each month. To date, this information has been held by her bank.
But the Open Banking regime means that such data will now be owned by the customer Mrs Edet, not the bank. She can share it electronically with businesses offering certain services to try to get a better deal on financial products, such as getting a cheaper overdraft elsewhere.
In practice and in time, Mrs Edet will probably see a dashboard on her bank’s smartphone app. This will show her how much money is in her accounts with different banks, and eventually how much she owes on credit cards and store cards too.
The dashboard will also allow Mrs Edet to use services provided, not just by her bank, but by another provider. So, a business separate to the bank might take money left over at the end of the month and invest or save it for Mrs Edet. This is open banking in practice. Experts claim this will be revolutionary for current account customers.
New rules known as Open Banking could see some banks disappear over time, says a UK-based Clydesdale and Yorkshire Banking Group chief executive, David Duffy.
He told BBC 5 Live’s Wake Up to Money podcast that the plan to allow people to share their financial information was a “once in a lifetime change”.
Open Banking means that from 13 January customers can choose to easily and securely allow their banks to share details with other banks and financially regulated companies in UK. With customers’ permission, those companies will be allowed to access data including earnings, debts, and credit cards – with the aim of offering them tailored financial products based on that information. Mr Duffy said this could spell the end of traditional banking as we know it.
“It’s not about one bank versus another or a small bank versus a big bank. It is how you survive in a world where other people do banking better than the banks do,” he said.
WhatsApp has introduced payments to its messaging app in India, making it the latest service to let users transfer money to one another with a text. When people have their banking information on the go, they can easily chat about it on WhatsApp and carry out important transactions.
After the pilot in India, this peer-to-peer payment would be available in Nigeria and other African countries and it will have profound effect on banks already haemorrhaging from revenue losses.
With the new service, users can now link their bank account to their WhatsApp account via Unified Payments Interface (UPI) and begin making payments straight to another user’s bank account through a WhatsApp chat.
According to Ndubisi Ekewe, who is familiar with the development, banks have everything to worry about the risks to some of their offerings.
“The telcos have hated the global messaging app; now the banks join the fray. The risk to banks is clear: if WhatsApp becomes very successful in payments, it may become a small bank of itself. In other words, if people decide to be leaving money in their wallets without moving them to their bank accounts, most banks would struggle [liquidity issues],” Ekewe added.
Challenge of Artificial Intelligence
Turning all of this into a coherent whole will be Facebook’s Artificial Intelligence (AI) powered assistant “M”, which is now effectively part of the Messenger.
Artificial Intelligence (AI) in banking is really helping serve the customer better and provide offers that are more relevant to them at the right time through the right channel.
Pierre Montagnier, Director of Customer Marketing, Analytics &Modeling, Bank of Montreal, said Artificial intelligence makes it possible for machines to learn from experience, adjust to new inputs and perform human-like tasks.
There is a new research by Accenture entitled, ‘Reworking the Revolution: Are You Ready to Compete as Intelligent Technology Meets Human Ingenuity to Create the Future Workforce?’
It estimates that if businesses invest in AI and human-machine collaboration at the same rate as top performing companies, they could boost revenues by 38 per cent by 2022 and raise employment levels by 10 per cent.
The challenge of Blockchain
Blockchain also known as Distributed Ledger Technology (DLT), is a digital platform and database that allows digital information to be distributed but not copied. At the moment, the financial industry, and banking in particular, has the biggest potential for disruption by blockchain technology. Its proponents are of the opinion that current banking processes are expensive and time-consuming and blockchain technology presents a much more secure and convenient alternative.
From all kinds of payments, settlements, trade finance and even compliance, the underlying features of blockchain technology seems almost tailor-made for banking and it is garnering increasing support from major players in the global financial services industry.
Originally, created to authenticate bitcoin transactions, blockchain was designed as a way to centralize record-keeping without needing third-party authorisation – like a bank or a regulator.
Experts say it would drastically cut down the time taken to complete a transaction. The standard transaction time for remittance is typically two business days. But blockchain technology has the ability to not only increase the speed and efficiency of sending and receiving money, it also drastically lowers transaction costs. There is an example. Thailand, through Siam Commercial Bank, and Japan’s SBI Remit, have mutually adopted the first blockchain-powered instant remittance service as a way to create another means of payment between the two countries. A transaction that would typically take two business days to complete is now being done in an estimated time of less than five seconds.
Another major area that DLT could give banking a significant upgrade – in terms of cost and efficiency – is in trade finance. It has the potential to fine-tune the cross-border trade finance process through the use of smart contracts. Blockchain can store any kind of digital information – including computer code which could be programmed to generate contracts or carry out transactions once a given set of conditions are met.
What must be done?
Some people might have dismissed the challenge of FinTech as a tech dystopia, and concluded that the GAFA challenge to banking will soon disappear all by itself. Yet,analysts warn that “keeping your fingers crossed” is not a sound business strategy.
Nokia reacting to Apple’s new world software challenge with hardware answers, is like banks trying to counter GAFA’s advanced tech challenge with a 0.5 per cent interest rate increase on to attract savings (subject to terms and conditions of course).
A recent research by PriceWatercoopers (PWC) revealed that a large majority of global banks, insurers and investment managers intend to increase their partnerships with FinTech companies over the next three to five years and expect an average return on investment of 20 per cent on their innovation projects.
This view is supported by Mr Victor Ndukuba, Deputy Managing Director, Afrinvest West Africa Limited in a chat with Nigerian Tribune.
He said the evolution of FinTech is never a threat but enabler to banking.
His words: “What will happen and is already happening is that banks will need financial technology to extend their services beyond their usual customer base. FinTech companies cannot totally eliminate traditional banking. What they will do is act as enabler to banking.”
According to Ndukuba, FinTech will make banks to seek for innovative ways of making services more accessible to more people. How do we make loans more accessible to borrowers? That is the question DMBs will be asking.
“If I don’t have a banking license from CBN as FinTech Company, I cannot actually begin to create loans. If I want to do that, I have to go and register as a DMB and get a license, pay not less than N10-N25 billion depending on the type of license, create deposits and begin to lend. After that, there is a challenge of trust because the app could shut down,” he explained.
According to the DMD Afrinvest, “What happens is that two of them have now began to work together. Banks now realize they cannot ignore this people, otherwise they will destroy their businesses. But at the same time, FinTech companies cannot operate as a bank. So, banks have to collaborate with them.
“That makes it easier and cheaper to reach more people because banks cannot establish branches everywhere.
“FinTech cannot do without the banks, just as the banks cannot do without it. It is a case of how can I help you to help me. A Fintech company does not have the financial muscle but they can take a N100 million from a bank, create an app, push it out there and get you additional two million customers that you don’t have before. But it is not to say that I will do without the banks,” Ndukuba told Nigerian Tribune.
Across the world, majority of global financial services companies plan to increase FinTech partnerships as 88 per cent express concern they will lose revenue to innovators, according to a new PwC global report, “Redrawing the lines: FinTech’s growing influence on Financial Services.”
According to the report, more consumers will adopt non-traditional Financial Services providers. Early adopters will most often conduct payment and money transfer activities with non-traditional providers, and personal finance will emerge as the next most populous activity at risk.
The Managing Director/Chief Executive Officer of Guaranty Trust Bank (GTBank), Segun Agbaje, at the 2018 Social Media Week in Lagos supports the view of partnership. He believes that business organisations, including banks, will fall behind except they are compliant to or become platforms that create access and collaboration in the digital world.
This is because technology is fast facilitating changes that were considered impossible about 30 years ago, and causing companies to grow exponentially rather than linear.
According to him, “flexibility and adaptability” are now the basics for banks and other business organisations to keep at par with the technology-driven business trends.”
Agbaje, who addressed the forum on “Making Sense of a World in Motion,” said “the currency today is access, not capital,” just as “collaboration and partnership are now critical and strategic to success,” hence FinTechs have to become a platform to survive.
Also thinking along this line is United Bank for Africa (UBA). It recently introduced Leo, the UBA Chat Banker that enables customers make use of their social media accounts to carry out key banking transactions.
Wema Bank launched ALAT, a digital-only bank with the ability to create and fund a savings account on mobile phone.
Similarly,in a bid to deliver digital payments to small businesses via the Facebook Messenger platform, Ecobank Transnational Incorporated went into strategic partnership with Facebook and MasterCard. With this partnership, micro-merchants will be able to receive instant payments using the Quick Response (QR) technology.
The future of banking
There is consensus opinion that the future of banking will depend on technology. It will favour banks that can properly harness technology to improve services to their customers, from offering financial services to the previously unbanked to providing consumer loans based on internet browsing pattern or social networking behaviour.
A herd of finance experts from Financial Derivatives Company (FDC) Limited led by Mr Bismarck Rewane agrees with this view. They believe that another way banks can respond to this competitive threat is by learning from and adopting best practices from the same FinTech firms that are challenging their very existence.
To them, time is running out for banks to start adapting. The new wave of digital banking is upon us and those that fail to embrace new technology and keep up with the pace of the new digital age will simply go out of business.
“A logical next step for Piggybank would be to start offering loans. In the same vein, technology can prove an advantage, as algorithms have enabled start-ups to assess credit worthiness and deliver loans quicker than traditional banks. Even if FinTech does not successfully disrupt the banking industry, it has created cost-effective models that also provide quality financial services,” the experts stated.
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