Should Banks Be Scared Of Fintech?

Last year, we witnessed the rise of many fintech platforms; from payment solutions to online lending applications, while the older fintech players continued to wax strong. Understandably banks are concerned about whether these platforms will do to them what digital photography did to kodak.

Banks have been particularly resilient to disruption, mainly due to advantages built up through their branch networks, expertise in providing credit, and the fact they have a regulated monopoly in accepting deposits. Meanwhile, consumers have been slow to adopt non-banking models for their financial needs. 

The term fintech refers to an evolving range of start-ups and companies leveraging technology to provide financial services. Technology models allow an ease of use that banks cannot yet match. You can request a loan from Paylater and get your alert in two hours. While you’re waiting for your alert, you can get a new dollar debit card from Get Barter and open a fixed deposit account with PiggyBank.

These models allow fintech platforms to offer customers a superior service at a lower cost. According to an EfinA survey, 48% of Nigerians are financially excluded. The efficiencies provided by technology also allow fintech platforms to reach customers that were previously unbanked – 80% of Kenyans now have access to formal financial services with 32% gaining access through mobile money platforms.

Don’t sound the alarms yet.

To identify the threat such platforms pose to banks, you need to understand the role of banks in society and the sources of their revenue. Banks are financial intermediaries: they take money from people looking to save (deposits) and give to people looking to borrow (loans). They generate interest on loans, and they collect fees and commissions on numerous value added services to the depositors; for example, money transfers, foreign exchange transactions, and bill payments.

A significant chunk of bank revenues come from net interest income – the difference between interest accrued and interest paid out. Nigerian fintech platforms are yet to challenge this income stream. So far, the most successful platforms have been companies like Interswitch and E-tranzact which focus on leveraging technology to provide particular services such as payments and transfers. 

Are banks safe?

Fintech players have found greater success when targeting segments that traditional banks have largely ignored. Yet it would be naive for Nigerian banks to dismiss this challenge.

According to Clayton Christensen, the originator of the theory of disruption, “Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket... while preserving the advantages that drove their early success.”

If the first part of that description sounds familiar – targeting overlooked segments with more suitable functionality and at a lower cost – it is because Nigerian fintechs have already done that. It would be unwise to believe they cannot do the second part.

Indeed, some fintech firms have started targeting the deposit and loans segments. PiggyBank, which uses recurring card payments to allow you to create and fund a savings account on your mobile phone, has proven popular among working class Nigerian youths. It offers an alternative to a traditional fixed deposit account which requires a number of visits to a physical branch to set up. A logical next step for Piggybank would be to start offering loans. Here too, 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 a superior customer experience, and the banks have taken note. Wema Bank recently launched ALAT, a digital-only bank with a major feature – the ability to create and fund a savings account on your mobile phone, while Stanbic IBTC debuted their first digital-only bank branch and a web app for instantly opening a bank account.

The future of banking in Nigeria will depend on which banks can properly harness technology to improve services to their customers, from offering financial services to previously unbanked to providing consumer loans based on your social networking behaviour. While the fintech revolution may not reinvent Nigeria's banking industry, it will likely create winners and losers in the sector. If individual banks do not adjust their models, they may find out that they are becoming increasingly irrelevant in the new digital economy.

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