21st Century banking challenges: A Fintech revolution

A client withdraws money from an ATM machine.

Due to financial sector liberalisation banks are facing challenges of competition not only from banks but also from non-banking financial entities, online banks and fintech companies. Unfortunately, traditional banks are losing their monopolies and comparative advantages which they have occupied before.

Majority of Rwanda’s financial institutions are transitioning from traditional ways of doing business to technology-based ones. More technology-driven products and services are also being introduced as technology advances. Eco Bank’s mobile banking app designed with help of partnership with MasterCard, a global payments and Technology Company is one of such digital products. National Bank of Rwanda also emphasizes on usage of digital products as tool for financial Inclusion in Rwanda.

 

The increasing popularity of FinTech companies is disrupting the way traditional banking has been done. This trend has created big challenge for traditional banks as they are not able to adjust quickly to the changes in technology, operations, culture, and other facets of the industry.

 

African banking challenges

 

African banking sector is undergoing structural change in the form of products and services.  Technology has emerged as a competitive weapon in driving operational excellence and superior service quality. While the banks compete among themselves with other banks, they are also facing existential threats from non banking entities.

In Africa, banking sector is mostly challenged by services from Fintech companies. Over the past few years with digital revolution in Africa consumers are turning towards more digitally driven services in the region. After the success of MPesa in Kenya, many fintech startups in Africa are aiming to bridge the digital gap across other unreached communities in the region.

Due to competition and fintech evolution African banking system is losing revenue in the form of fee charges on payments and also deposits are reducing due to increased expenditure and reduced savings of people. To mitigate the lost revenue, banks are trying hard in retail and corporate banking.

In Nigeria, there has been growth of fintech due to surge in e-commerce and smartphone usage. Nigeria’s Interswitch, is an integrated digital payments and commerce company that facilitates the electronic circulation of money as well as the exchange of value between individuals and organizations on a timely and consistent basis.

If banks are not innovative they will lose fees and commission on their services and products. To make them relevant they have to offer differentiated value added products. Since customers now have more choices and are more fragmented, disintermediation by fintech companies is making it harder for banks to get income from fees through services. Legacy infrastructures, like banking branches, are doing lesser activities and continue to depress margins because customers have moved to new tech oriented channels.

Global banking challenges

Globally, digital and online banking is becoming popular. Traditional banks are losing customers and income. According to survey conducted by Bank of America 2016 , online-only banks have successfully broadened their customer appeal, especially among newer generations including Millennials (68 percent) and Gen Xers (70 percent) are most likely to use digital banking services, compared to the 62 percent average across all age groups.

In a survey conducted in 2016 by PwC, 25 percent of respondents reported a concern that their business could be lost to standalone FinTech companies within five years. 81 percent banking CEOs were concerned about the speed of technological change.

Traditional banks in Europe are struggling with compressed margins and a decline in branch activity. New European regulations are forcing them to re-evaluate their operating models, and they are facing unprecedented cyber-security threats and heightening competition from digital interlopers.

Studies from McKinsey and IBM estimated that up to 35% of the banking industry’s profitability will be wiped out by digital technologies. According to IBM’s General Manager for Global Banking and Financial Markets, Fintech players are putting downward pressure on fees, so banks are going to have to make their money throughout value-added services.

Recommendations

In era of competition and online digital technology, traditional banks have to try hard to maintain their position in economy. They need to brand themselves through customer service, new innovative digital tools. In Developing countries lacking resources and technology banks should try to collaborate and enter into partnerships with international and innovative organizations.

The writer is a Kigali based economist and consultant.

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