5 REASONS WHY NIGERIAN BANKS SHOULD BE WEARY OF THE FINTECH CHALLENGE

The COVID 19 pandemic has significantly accelerated the rate of digital disruption across almost every industry, helping digitally-enabled companies, fuelled by their geographically unrestricted 24/7 access, lower customer adoption cost and better user experience to grow in leaps and bounds. Entire industries are changing…newspapers, media & entertainment, hospitality & travel, telecommunications, healthcare, banking, retail etc. with over half of the Fortune 500 companies from the year 2000 no longer in business.

While the impact of this disruption may vary from one industry to another, the Nigerian financial service industry has not been left out of this disruptive wave. FinTechs are rapidly redrawing the competitive financial services landscape and blurring industry boundaries. Nigeria is now home to almost 250 FinTech standalone organisations, and they are some of the fastest-growing businesses in the country. To put this into perspective, Flutterwave, which began operations in 2016, is estimated to be worth over a billion dollars following its latest funding round. Other FinTech players like Paystack, Interswitch and Paga are already worth more than 75% of Nigerian banks despite their relatively younger existence and significantly lower startup capital investments.

Understandably banks are concerned about whether these platforms will do to them what digital photography did to Kodak. FinTechs are naturally better set up to leverage technology to reach a more extensive customer base without the associated costs of building infrastructure and are therefore better at managing cost to serve. They are taking advantage of the gaps that traditional banks have created due to their limited service digitisation, rigid account opening process, location-centred operations, high service costs (interests and fees) and poor user experience on digital channels.

Although conventional banks are rapidly migrating to more digital operating models, they are still playing catchup to the FinTechs born with technology in their DNA. Some global reports estimate that traditional banks are at the risk of losing as much as 25% of their revenues to FinTechs within the next few years. Some experts estimate that this could be more in Nigeria.

Kenya was one of the first African countries to embrace mobile payments fully and may provide some insight into the future that may unravel across the continent. The value of mobile money transactions in Kenya represents over 50% of the GDP, with transactions on a single FinTech platform — M-Pesa- representing about 25% of the country’s GDP.

These trends are making people ask the obvious question — should banks be concerned, and how should they respond to the growing threat imposed by the FinTech companies? Here are five reasons why banks would do well not to disregard the fintech movement:

FinTechs are attracting a lot of interest and funding from investors globally: Between 2014 and 2019, Nigeria’s bustling FinTech scene raised more than $600 million in funding, attracting 25% ($122 million) of the $491.6 million raised by African tech startups in 2019 alone — second only to Kenya, which attracted $149 million. We are also already seeing similar trends post the COVID-19 pandemic. In the 1st quarter of 2021, eleven Nigerian FinTech startups attracted $216.6 million (N88.5 billion) in funding to scale up their solutions and deepen the financial inclusion strategy of the Central Bank of Nigeria (CBN).

• Paystack recently raised $8 million from Stripe, Visa, Tencent and Y Combinator.
• Flutterwave equally raised $205m from US VC firms Greycroft and eVentures Visa, Green Visor, African fund CRE Venture Capital, Avenir Growth Capital (“Avenir”), Tiger Global Management LLC (“Tiger Global”), and other new investors..
• Paga raised $23m from Adlevo Capital, Goodwell and Omidyar Network.
• Interswitch was widely applauded as the first Nigerian FinTech Unicorn after raising $200m from Visa.

By all indications, this trend is likely to continue.

African Governments are now softening their initially rigid position on FinTechs: In a bid to drive financial inclusion and a cashless economy, the Central Bank of Nigeria has developed policies and initiatives that have fuelled the growing adoption and popularity of Financial Technology (FinTech) firms. One such policy is the Payment Service Bank (PSB) initiative which will give more prominence to FinTechs and Mobile Network Operators over commercial banks.

FinTechs are relatively better positioned for growth: Research shows that 73.2 million adults representing 41.6% of the adult population in Nigeria are financially excluded. Most of the financially excluded population are from rural areas where traditional banks have found it difficult to expand. As opposed to conventional banks, which need to expand their infrastructure to these rural areas to tap into these markets, FinTechs only need this population to have access to smartphones and the internet. They are also much less constrained by regulations. As a result, they can capture this “unbanked market” faster and more cost-effectively than traditional banks.

Fintechs are better positioned to serve the fast-growing Nigerian young, digital-savvy population: Nigeria has one of the most youthful populations globally, with over 50% of its population below the age of 25. This age group is naturally digital savvy and more likely to adopt technology faster. As a result, this vast population of people is more likely to bank with FinTechs than traditional banks.

FinTechs provide a better customer experience: While traditional banks are increasingly making considerable investments to create new digital offerings, many of these initiatives are not well integrated with their more established brick-and-mortar operations. This has created a poor user experience and avoidable customer frustrations. The complexity of their existing systems — built on generations of difficult-to-integrate legacy technologies — combined with an incumbent culture that may not be optimised for today’s digital marketplace acts as barriers to the kind of progress that many consumers expect from their financial services providers. On the other hand, FinTechs are smaller, less rigid organisations, allowing them innovate faster, respond better, create better user experience and develop custom financial service offering in an environment where banks struggle.

WHAT BANKS MUST START DOING NOW

The traditional banks are not without their advantage. They typically cater to the broader audience, while FinTech services are designed to bridge specific market gaps. However, a significant percentage of consumers — even among Millennials — are not necessarily excited about using different providers to manage deposits, borrow, invest, and plan their retirement. The typically narrow focus of FinTechs also limits the touchpoints that lead to the development of trusted relationships. This challenge is further exacerbated in Africa by the preference of most FinTechs to limit their interactions with consumers to primarily digital channels.

Traditional banks currently sit on decades of customer data that, if mined, can provide valuable behavioural and predictive insight capable of levelling the playing field. But this would require that they develop their big-data analytics capabilities and become math houses like the tech giants.

Many FinTechs also struggle to transition from being technology-focused to becoming business and client-focused. Having great technology does not always equate to having a successful business. FinTechs will need to adopt an effective strategy and operating model, raise huge amounts of capital to compete with the banks, hire competent talent to drive their operations, adopt innovative marketing campaigns to build mindshare while equally investing in customer support and service.

On the other hand, banks must prioritise acquiring the right tech talents that can help with both digitisation and making sense of their vast data resources.

Banks would also do well to identify new revenue pools by leveraging their existing assets to compete with different FinTech players and industry peers for customer wallet share, especially in less contested markets that are opening, such as agent banking, SME lending, Non-Interest banking and credit at the point of commerce.

Alternatively, banks could consider acquiring or partnering with FinTech players. This would help them integrate and drive innovation faster as opposed to starting the entire process from scratch.

CONCLUSION

Will FinTechs and banks co-exist to offer the best of both worlds? Maybe FinTechs will prove to be the succeeding generation of banking solutions and leave banks in their dust, or are traditional banks embracing technology fast enough to withstand the fierce competition from FinTech companies?

It’s still a little too early to predict who will come out on top in this banking game of thrones. Looking ahead, it seems clear that the future does not belong to any single category and leading players in each of these segments have opportunities to survive and thrive over the next few years.

There’s no way to tell what the future holds, but it would definitely be exciting to see how the rivalry between these existing and emerging corporate giants play out.