Fintech & Banks. Enemies or Friends?

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Fintech, short for Financial Technology, is the use of technology to improve existing financial products/services and also create more efficient ones. Fintech has transformed how consumers interact with and react to financial products and services.

Initially, this technology served the traditional financial establishments like banks and trading firms but in recent times, there has been a shift towards serving the consumers directly. This shift has encouraged the general perception that fintech companies are disrupting the banking industry. However, this should not be the case. While fintech companies are certainly disrupting the banking service space, a more effective way of achieving their common goal of easing transactions for the end-user is by collaborating.

Fintech companies and banks have diverse ways of partnering with each other to achieve their goals. Banks have acquired the funds, user trust built over time, the strong knowledge of regulatory requirements, and tried and trusted processes that have allowed them to stand the test of time.

Fintech companies have the leanness and agility to change quickly, in accordance with fast-paced technology. With the advent of technology, the customers want a different experience from the existing and fintech companies can deliver this in a way that banks cannot.

Banks also allow fintech companies the opportunity to scale, improve their process and offer their services for a cheaper price. The combination of these offers end-users speed and ease of transaction at a cost that was not easily attainable before. As fintech companies generally are not as constrained by regulation, they are able to push the boundaries of innovation while banks put the safety checks in place to protect the end-user.

Fintech companies can be useful in the area of data collation and storage. Some fintech companies can offer banks access to the data of end users who lack credit history, are underbanked or unbanked. The average Nigerian is more likely to have encountered and used a fintech service more often than the traditional banking hall, not only because of the services fintech offer but also because fintech companies have the agility and flexibility to reach spaces that banks cannot because of their size and risk aversion.

Fintech companies like Interswitch provide end to end electronic payment solutions for banks to leverage on and use for deposit mobilization. These solutions are usually directly integrated into the core banking system. Another illustration of effective collaboration is in the area of card production. Even though Fintech companies are the major producers of cards in Nigeria, CBN licenses only banks to issue cards, therefore partnership is imperative in this space as banks cannot produce the cards they need and fintech companies cannot issue these cards directly to the end-user.

An example of a bank-fintech partnership that has helped improved financial inclusion is the partnership of Mastercard/Net1/Grindrod Bank to reach unbanked people in South Africa. Grindrod Bank provides the banking license for the operation and the bank accounts for new customers. Mastercard provides the network and access to POS and ATMs. Net1 provides biometric technology and the customer onboarding process required. [1]

In Africa, consumers pay a premium to send or receive money from abroad. Not only do they pay a higher price than other countries, but the existing services are also limited by a scarcity of foreign exchange and strict government regulations. Many people, therefore, resort to other methods such as black markets, informal peer-to-peer money transfer on social media, travelers, e.t.c.

Kaoshi is solving this by providing a unique peer-to-peer platform that enables Africans to send money overseas in a cheap and far more efficient manner without these restrictions. This service, when incorporated by banks allows them to serve their customers’ forex money transfer need without relying on the government’s tightly controlled foreign reserves. This allows banks to offer the cheapest and quickest cross-border money transfer to their customers. Banks, in turn, provide the security and customer base to make such transactions happen at scale. [2]

With these different characteristics and the same end goal of delivering value to the customer, a partnership becomes imperative for the banks and fintech companies. Further partnerships and less competition between banks and fintech companies will create more value to the ultimate end-users, produce better customer analytics and enhance risk management.

References

  1. “How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines” — Institute of International Finance/Center for Financial Inclusion (July 2017).
  2. Kaoshi — kaoshi.network/faq.html
  3. Global FinTech Adoption Index 2019 — Ernst and Young