The conventional banking model that has been prevalent throughout the rest of the world for hundreds of years has struggled to sink its teeth into Africa. Today up to 80% of Africans do not use, or have access to traditional banking services. The high cost of banking infrastructure coupled with the dearth of assets and credit held by most Africans have contributed to this situation. Additionally for the majority of Africans, traditional banking has historically never been a service that holds relevance in day to day life. However, financial technology startups, otherwise known as fintech, are seeing rapid success across the continent. Banks are frantically courting the fintech sector, in an effort to avoid impending obsolescence.
The winds of change
Riding the cusp of the digital wave, tech firms are reaching an ever wider African consumer base. This has been facilitated by the explosion of mobile phone usage. Africa now has more mobile phone connections than any other continent besides Asia, and smartphones are becoming widely used. Fintech firms have used this as a platform by which to service previously untapped markets.
Safaricom’s M-Pesa is an early example of this; in conjunction with Vodafone, M-Pesa has provided millions of people with money transfer, payment, deposit and withdrawal services.
More recent fintech solutions are disrupting the market further still, causing change and driving progress in a way traditional banks have been unable to do. Blockchain and Bitcoin related technologies are prime examples. Blockchain creates multiple electronic receipts of transactions and stores them on numerous computers around the world. This verified and secure new technology undermines banks’ traditional roles as a third party insurer of trust. Similarly, Bitcoin is a transcendent technology that sidesteps banking regulations and can act as a cross border currency for inter-continental trade.
Making moves
David Lynch, Managing Director of DBS Bank, notes, “This time around, traditional bank-to-bank competition is not the issue. This new wave of competition is coming from both nimble, innovative, cloud- and mobile-first startups as well as the major technology players largely unencumbered by policy and regulation.”
Many major banks have made moves to embrace these new phenomena. Citi Group for instance, has taken a proactive approach by inviting developers to create solutions for their online platform. Similarly, Barclays Africa has taken their Rise platform, designed to identify and accelerate growth of promising startups, to Africa. It’s not just global names that are cozying up to fintech firms. Africa-based banks such as Standard Bank and Bank of Industry have made similar efforts over the past year.
The Benefits of Partnership
Some commentators see the increased cooperation between banks and startups as a solely positive, symbiotic relationship. Banks can assist startups by providing much needed capital in the early stages. Additionally, banks offer access to customers, networks and financial expertise. The prestige of big brand backing, and the consumer confidence that comes with it, is also invaluable for fledgling firms. In return, banks are managing to stay relevant and are seeing their reach expanded. Doing this internally without startups would be astronomically expensive, not to mention difficult to execute for such cumbersome and entrenched organizations.
However, not all partnerships have been fruitful. The Kenyan division of Chase Bank was taken into receivership by the Kenyan Central Bank last month. Chase had built relationships and invested in multiple fintech startups. The future of these relationships is now in jeopardy, with some of the startups under Chase reporting that their accounts have been affected, and that in some cases money is owed. This highlights that the relationship is by no means risk-free, especially given the volatility and disruption in Africa’s financial sector. Even banking giants such as Barclays aren’t a safe bet for startups. Barclays has announced its withdrawal from Africa over the next three years, which cast doubt over the partnerships the firm has been building with startups in the region.
Ultimately, shrewd banks are wise to cultivate relationships with the fintech sector. Those that do stand to survive disruption on the continent, and can themselves evolve in the process. Those that don’t risk falling by the wayside. Fintech firms can also benefit from partnership, although not all relationships are risk-free. Additionally, skeptical commentators have suggested that Bitcoin and Blockchain pose an existential risk to traditional banking, and that big banking’s courtship of these new technologies is insidious in nature. Whether this is the case or not, banks aren’t investing in fintech for philanthropic reasons, they are doing so to survive. Fintech firms should be aware of the intentions behind their suitors’ smiles.