Africa’s banks bracing for Fintech

February 17, 2017

Fintech is causing headache to African banking players who are already grappling with mobile money revolution. The wave of financial technology companies, more widely known as fintech firms, has affected Africans lives in many ways, as fintech offers simplicity, speed, cohesiveness and streamlined processes. The overwhelming majority of Africa’s banks and traditional financial services firms believe part of their business is at risk of being lost to standalone Fintech challengers.The banks are already assessing the rise of new technologies in financial services and their impact on the sector, and according to some data available to me, banks in South Africa, Ghana, Nigeria and Kenya found that three quarter of traditional financial services firms believe part of their business is at risk from a Fintech disrupter.In Kenya, half of banks believe their business could be at risk due to the emergence of Fintech, with Fintech companies themselves anticipating they could capture two third of their business.The Kenyan case demonstrates that the sector has only recently tuned in to the Fintech challenge, and hasn’t yet worked out how to respond although they recently appointed Jennifer Theuri to advise them on best way to handle fintech onslaught. The boundaries between Africa’s traditional financial organisations, technology companies and telecommunications firms are being smashed. What Africans are seeing now is a dawning awareness of the challenges and opportunities that Fintech presents, and established players are now falling over themselves to get into the game.More than half of Nigeria’s financial services companies placed pressure on profit margins as the top Fintech related threat, followed by loss of market share.I can bet that there will be no African country which will be immune from this financial revolution change.

The South Africa’s financial services industry, particularly on the banking side, has historically never really come under significant pressure from new or overseas market entrants. However the emergence of Fintech as a force will change all that, the key question will be whether the South Africa’s sector embraces the change or tries to stymie it. Fortunately it looks to be the former, with 2017 set to be the year of the pilot for Fintech with established firms, ahead of operational rollouts from 2018 onwards.  Blockchain, a distributed ledger technology, represents the next evolutionary jump in Africa’s business process optimisation technology.Overall, it ranks low on the agendas of banks.While more than half of banks recognise its importance, more than a third believe they are unsure or unlikely to respond to this trend.  African companies in the banking sector that want to remain ahead will need make technologies like blockchain business as usual, and quickly. In my view, the current lack of understanding of blockchain technology does pose a risk to existing business models, the winners will be the ones that take the time to understand the technology and the opportunity it provides. Many fintech players are already offering a variety of services in several African countries.The fintech industry had evolved considerably because of the rapid development of technology, the inception of the internet and the wide penetration of smartphones in Africa.What is interesting is that the fintech market has not even reached its tipping point across the continent. Statistics in my possession reveal that only a minor fraction, about 5 percent of African consumer banking revenues, has moved to new digital modes. However, the growth of fintech cannot be ignored. Investments in private fintech companies in Africa increased eight times in the past two years.The industry’s growth, however, has sparked a controversy. Some see it as a disruption of technology while others construed it as a technology enabler for financial services.

Banking sectors consider fintech as a threat as some fintech players have targeted profitable areas of the banking industry, particularly payment services.There are hundreds of African startups with a lot of brains and money working on various alternatives to traditional banking. Fintech has revolutionised the way Africa’s financial services are provided to consumers from streamlined payments, integrated billing, e-payments, crowdfunding, comparing financial products among others services.There’s need to encourage a collaboration instead of competition between financial institutions and fintech players as it could bring benefits for both of them.The financial institutions can take advantage of the disruptive nature of the role and culture of fintech that may spark innovation without being limited by the constraint of the financial institution’s infrastructure and culture.In the case of fintech, teaming up with financial institution providers can provide access to payment markets and regulatory payments-market experiences.Kenya has been successful and taken a lead in the fintech market in East Africa.The success story of fintech in Kenya is mainly driven by a combination of a high population, a low access to banking services, a high penetration of mobile phones and internet networks and relaxed regulations.These driving factors are actually quite similar to existing conditions in Nigeria and Ghana.Africa’s penetration of mobile phones is relatively high notwithstanding that telecommunications infrastructures are still under-developed with only 45 percent using mobile devices for banking services in East Africa and much lower rate in other parts of the continent. These factors combined with Africa’s relatively growing macroeconomic growth offers a huge opportunity in the fintech industry.No wonder many fintech players both international and local are entering into African market.The African fintech market is indeed a promising market for fintech players and banks have no option but to embrace the technology or exit. Africa’s demographic composition and macroeconomics situation are becoming primary factors for attracting fintech business models in the region.In boosting the growth of the fintech industry, African countries should also focus on providing a clear, predictable and sustainable legal framework for the fintech industry.The most important thing is that African countries should be able to take the right approach in regulating this nascent industry so it can have the opportunity to grow properly.

Contador Harrison