Banks, FinTechs struggle for banking space

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IN time past, FinTech (financial technology) companies concentrated only on leveraging digital innovations to proffer solutions in the finance space. Currently, they seem to be gnawing beyond their turf as they now carry out some typical banking operations such as payments, deposits and lending, among others.

More revealing is the unabashed gain of momentum by BigTech companies such as Amazon, eBay, Google, Uber, Apple and Samsung and others, that have stretched their offerings beyond the expected lanes of their businesses, to begin to carry out typical banking operations such as funds deposit, loans and payments, among other operations.

With these uprising trends in the financial space, there remains a huge hanging question–will traditional banks keep up the pace, partner with these FinTech and BigTech companies, or faze out of the scene with little contributions to the banking/money space?

This was the crux of the conversation that traversed among policy makers, financial experts; the NDIC and finance journalists at the seminar for finance correspondents, organised by the Corporation, last year.

Financial Stability Board defines FinTech as technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services.

The last statement ‘…associated material effect on the provision of financial services,’ means that it has an impact on data privacy, consumer protection and the way FinTechs are supposed to respond to regulatory authorities such as the Nigeria Deposit Insurance Corporation (NDIC), Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC), among others.

BigTech, on the other hand, are large globally active technology firms with a relative advantage in digital technology.

It is interesting that technological disruption is having all forms of impacts (both positive and negative) on the finance industry. Some stakeholders seem to believe that technological innovations will lead to new and better products and services for customers. However, payment services seem to be the most affected and disrupted by technology, followed by customer management and retail lending.

Banking is gradually and will be diametrically different as the years unfold, as FinTech and BigTech companies are increasingly stepping on banks’ traditional territory.

According to the 22nd Geneva Report on World Economy, “BigTech and FinTech are increasingly competing with banks, but in different ways. banks are likely to see FinTechs as technology partners and as competitors. BigTechs, on the other hand, are less likely to be seen as partners.

“Technological disruption challenges not only the business models of banks but also the existing models of regulation. Financial stability, competition and data protection remain the three over-arching goals of financial regulation. The challenges range from cloud computing and artificial intelligence, to activity-based regulations, takeover legislation and data ownership and privacy,” it said.

FinTechs’, BigTechs’ contributions to financial inclusion

Critical players in the finance sector describe this year as a defining one for the significant achievement of financial inclusion, especially among those in the rural areas. That is, by this year, 80 per cent of Nigerians should have unhindered access to financial services.

What is interesting is that FinTechs seems to be the greatest contributor and driving force for this target. Whether the target will be achieved remains a conjecture.

Although the NDIC’s primary mandate lay in the effective supervision of insured banks, timely payment of insured deposits and the implementation of a robust and efficient failure resolution regime, the Corporation, alongside other regulators such as the CBN, SEC, NAICOM and others, is at the vanguard of championing the course for financial inclusion in the country.

In the financial inclusion strategy of the Central Bank of Nigeria (CBN) in 2012, it was realised that only two per cent of adults had access to credit, while only 21.6 per cent and 24 per cent had access to payment services and savings accounts respectively.

However, two years ago, the CBN released an exposure draft of the Financial Inclusion Strategy Refresh. It was discovered from the report that one of the major reasons we failed as a country to meet the 2012 financial inclusion strategy was the lack of appropriately regulated level playing field for FinTechs.

This explicitly shows the critically important role FinTechs play to ensure holistic and exhaustive financial inclusion.

Mobile banking has become the most democratised form of banking operations in funds transfer and withdrawals, as more and more people find it most convenient to make and receive payments via their mobile phones and other related gizmos, instead of going through the arduous process of queuing endlessly in banks. FinTechs and BigTechs have made it easier to do this owing to their innovative digital platforms and services.

According to the Deputy Director, Research Department, NDIC, Dr. Kabir Katata, examples of FinTechs are credit cards, mobile payments, cloud computing and blockchain, and others. It is important to us because it helps the depositors and those who need to have access to financial services easier, faster and cheaper. That is why we are keen on enhancing financial inclusion.

“FinTech promises to help achieve the efforts by the CBN in terms of financial inclusion, supported by the NDIC and other agencies.”

He further added: “It can also help Small and Medium-Scale Enterprises (SMEs) get access to credit, enhance competition, as well as increase the resilience of the financial system if it is done right. If it is not done right, then we have a big problem”.

Challenges banks face from the entry of FinTechs, BigTechs

The threat to banks’ extinction is not a recent phenomenon. However, with the flurry of disruptions in the banking space, experts are forced to ask: Is this the beginning of the end of the banking system, as new technologies seem to be changing the way individuals and businesses use financial services in general, particularly banking services?

In some cases, specific demographics, especially the millennial, are moving away from traditional depository institutions, into contemporary banking and FinTech platforms.

The Geneva report on World Economy noted: “Two-thirds of millennial Americans moved $24 billion through the mobile P2P platform Venmo in the second quarter of last year.

“BigTech firms are challenging incumbent banks, but in a different manner than FinTechs. Big- Tech firms are gaining significant traction in the provision of financial services in some markets, particularly in China, and are becoming active in other regions, including Africa, India, Indonesia and Latin America.

“BigTech firms have large and developed customer networks established through, for example, e-commerce platforms or messaging services. Their collection of proprietary data and use of technology, increasingly including advanced practices such as AI and machine learning, allows these firms to gather significant information on their users to help tailor their offering to individual customers’ preferences.

“BigTechs have the potential to become dominant through the advantages afforded by both of these features – their collection of valuable data and their large, established networks (BIS, 2019). While FinTech firms initially did not interact directly with consumers, Big Tech’s aim is to enhance the interaction with the user or consumer.”

For example, Amazon lent $1bn to SME in 2017, while Art Financials of China had $5bn in outstanding loans at the end of 2017, primarily to SMEs. As at last year, Amazon had given out $5bn to SMEs; now they are battling court order to start accepting deposits.

Dr. Katata said: “It is also important to understand that FinTech is broad. For instance, there are banks that exist only digitally, where you open an account and carry out transactions online; consumer protection is through e-mails; customer services through e-mails and phone calls, among others. FinTech has made this possible.

“We also have what amazon is doing. The fear of Amazon is the beginning of wisdom. They have put out a lot of book stores out of business; anywhere they touch, they disrupt, amass and move on.

“We have applications such as open banking where you can have different deposit rates. For a long time in most of the developed economies, you will see that FinTechs have access to customers’ data through Application Programming Interfaces (APIs), so that you can have the rates and comparison sites. There is also cloud computing, artificial intelligence – where customers can chat and inquire about banking services, while the respondent on the other end is not human but artificial intelligence algorithm.

Godwin Emefiele

“Distributed Ledger Technology (DLT) is one of many transformative new technologies that will shake future financial services infrastructure and should be seen as part of the toolbox. The beauty of the DLT is in biometrics, which we already have in the Bank Verification Number (BVN).

“BigTech companies such as Amazon, Ali Baba and Uber also offer some financial services because they use their platforms to offer services. For example, riders use O-Pay, which collects BVN and also gives loans.

“However, we need to know the sponsors and promoters of O-Pay because they are encroaching”.

He further added: “On cloud computing, if you want to set up a new bank, you don’t need to set up a huge data centre or a huge IT department. All you need to do is go to Microsoft and other related companies and set up everything, then you are up and running.

“Although several banks are developing in-house financial technologies, however, we mostly import these technologies, which are offered by Google and others.

“The reason it seems as though the CBN and NDIC are slow in adopting or validating a FinTech is that when you develop something today, there is that small issue that it has to be tested and we need to know the company before they start to collect people’s money or data. When operators say regulators are slow, perhaps, because there are processes involved.

“Another problem with the regulation of FinTech is that when you are trying to understand what they are doing, they don’t want to explain to you; you cannot be licensed without being understood.”

New generation disruptors on the horizon

FinTechs are among the fastest-growing technology companies in the country. In 2019, FinTech firms raised over $120 million in funding. Already, some of these companies are top players in the world.

“According to a report by PwC in 2016, showing which part of the financial sector is likely to be most affected by FinTech over the next five years: It shows that consumer banking is first, followed by fund transfer and then investment banking and SME banking. Truly, their effects have been far-reaching.

“Money transfer and payments have been disrupted the most, even in Nigeria. In Nigeria, it is the payment that is most affected by the disruption in the banking space. The guideline and circulars released by the CBN have been very instrumental in guiding the space.

“According to PwC 2017 survey, what drives FinTech is their data analytics and Artificial Intelligence,” said Dr. Katata.

Among the top players in the FinTech space are Interswitch, Flutterwave, O-Pay, Paystack, Branch and TransferWise, among others.

There is the overarching concern for the security of funds as cyber hacking has become the order of the day, making banks and other financial institutions invest heavily in protecting their customers’ funds and data against exposures to unethical hackers.

In 2016, cyber thieves looted over $100 million from Bangladesh’s Central Bank. Sometimes we hear that Microsoft website has been hacked, Cisco is having issues, among other issues. Cyber risk always exists in as much as you are online. Banks suffer from operational risks and critical infrastructure.

There is, therefore, the need for financial institutions, their customers and everyone dealing and trading with FinTechs, BigTechs, to pay extra attention to how they use and give up their data, passwords etc., in the process of carrying out a transaction. Data privacy is crucial!

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