Bridging The Gap Between Fintechs and Banks in Africa — Recap Bank 4.0 Session, Sahara Sparks 2020
This article is a recap of the Fintechs and Banks session that happened during Sahara Sparks 2020 themed Africa Beyond 2020. The session was organized by Sahara Ventures and Tembo Plus, a fintech startup.
There are more than 400 fintech firms across Africa according to the data and insights company Weetracker. The startups offer a range of services enabling payments, funds transfer, wealth management, lending, etc. The potential of fintech is seen across the continents with Kenya, Nigeria, and South Africa taking the leading seat. African fintechs have been able to strive and survive against all odds; lack of capital, unsportive regulations, and hesitation of African corporates to work with fintechs.
One of the biggest challenges facing African fintechs is establishing strategic partnerships with local financial institutions. Even though local financial institutions know the opportunities for partnering and working with fintechs companies most of the fintechs still struggles to integrate with local banks. Commenting during the session, one of the startup founders felt banks are very slow and bureaucratic in making decisions. The representative from the banking sector who were part of the session also had the same feeling but they had several reasons why including; fintechs facing them prematurely, challenges with regulations, technology and security concerns, business viability, etc.
Banks Are Forced to Innovate
Globally banks are trying to innovate their way out of the stiff competition from the fintechs. Banks are trying different corporate innovation approaches and strategies that will ensure they get the upper hand against the competition from fintechs companies including; starting internal incubation and acceleration programs, establishing internal venture funds, partnering or acquiring fintech companies, and launching their own fintech subsidiaries. While both banks and fintechs are racing to capitalize on the digital financial services (DFS) market banks primarily banks rely on their strength on customers' trust and data they possess while fintechs focuses on bringing agility and innovation and reaching untapped markets.
The good news to the banks is that even though in the last 10 years there has been massive disruption by fintechs in the digital financial sector, most of the fintech startups primarily operates in some specific sub-sector for example; McKinsey analysis of a sample of startup data shows that 62% of startups are tackling the retail banking segment, with only 11% focused on large corporate banking offerings. Most startups still try to fix payments and have closed eyes to the opportunities in other digital financial services sub-sectors. Their primary customers being retail customers offering them digital payment services products. Banks still enjoying a lion's share of the commercial and large corporate customers especially on services like accounts management, and financial assets & capital markets.
Fintechs Are No Longer Broke
One of the most funded startup sectors in Africa is Fintech. According to Weetracker, African fintech startups have raised a combined USD 678.73 Mn in funding in 2019. Companies such as Beyonic, DPO Group, and Sendwave were among the notable M&A deals. Some Fintechs have raised more money than an average bank operating in Africa. The recent $200M plus acquisition of Nigeria’s Paystack by Stripe shows whats the future looks like for promising Fintechs in the continent. The acquisition of Paystack doesn’t tell all story on the lucrativeness of the sector. Published by Digest Africa the list of most lucrative fintech deals in Africa include; Mines ($16M), Yoco ( $18M), Zoona ($19M), Flutterwave ($20M), Paga ($35M), Carepay ($45M), OPay ($50M), Jumo ($68M) and Cellulant ($55M). It is very clear for promising Africa Fintechs, banks can longer use capital as a competitive advantage.
Bank 4.0 is here
Bank 4.0 is the latest edition of banking driven by customer and execution experience also know as experience-driven banking. To some markets Bank, 4.0 experience still looks like a SiFi movie or documentary but it is real and it is happening. Banks are becoming more integrated into our lives than ever before. The services we receive are fast, convenient, reliable, and smarter compared to the previous generation of banking.
Bank 4.0 is not about digitizing the traditional bank but completely disrupt and transforming how a traditional bank operate. As explained by the guru in the sector, Brett King, “Banking is no longer somewhere you go, it’s something you do”.
In the previous generation of banking we were seeing incremental innovation which basically based on digitizing some components of the banks to bring the experience of the physical bank to the consumer — what we are witnessing now is a complete disruption of the sector whereby new features and smart services which traditionally were never thought of are being offered by a digital-enabled bank. To capitalize on Bank 4.0 in Africa African banks and fintechs need to find a way to work together.
Strategic Partnerships
With all that is happening, the strategic partnership looks like is the next stage for the Fintechs and banks in Africa. From the session, the feeling was mutual to both startup founders and bankers that there is a need to establish strategic collaboration between the two. The key issue was why that is not happening more often. Four issues were identified among the reasons why banks and fintechs are struggling to collaborate in Africa; Technical Factors, Business Factors, Consumer Factors, and Regulation Factors. The team at Sahara Ventures worked to design a four-quadrant framework to establish how these factors inter-relate and the perception of both sides.
Business Factors
Quoting one of the representatives of the bank, “Some fintech startup founders are struggling to understand in order for us to partner with them their product or services needs to make a commercial sense”. The feeling from the bankers was most of the fintech startups in Africa just replicate products from other markets without doing a deep analysis of whether those products have attained the product-market-fit in the local market. There was also an issue of conflict of interest between fintechs and banks where both are working on a similar product. Bankers complained the fintechs are not doing enough research to understand what product or service the bank they intend to partner with is working on, and eventually complaints of infringements of copyrights and IP issues.
On the side of the fintechs, the feeling was there is a lot of red tapes and bureaucracy when it comes to discussing strategic business partnerships with banks. Also, the banks wanting to have the unfair upper hand in every point of the partnership negotiation. One fintech startup founder commenting, “you will always move on the corridors meeting different people all excited about your product but nobody is making a decision. They are moving too slow”. Both sides collectively agreed for the partnership to make sense the proposed product must be commercially viable and there should be enough flexibility from the bank side for things to move fast and smoothly. The bankers wanted the startups to spend more time to understand their business model and their unique value proposition to the banks and their customers rather than just focusing on the technical side of things.
Technical Factors
Confidentiality, Integrity, and Availability (CIA) are key when it comes to working with banks especially when you want to integrate with their core banking system and other digital services. Banks' priority is to ensure among other things there is enough security offered by third-party applications linked to their platforms and they follow industry standards. Most Fintechs especially those in the real stage with weak technical teams tend to underestimate this which makes life very difficult during integration with APIs from the banks. Fintech founders targeting to link their services with banks need to invest more time to study industry standards and understand the prerequisites of integrating with bank systems.
To the banks, there is a need to create testing and deployment sandboxes for Fintechs to ensure at least they get a chance to test their products without affecting the security and availability of the banking systems. Banks need to be flexible enough to create systems that encourage new innovations to be adopted within their digital systems. Banks are advised to have people in their technical teams who are specialized in systems integration to make it easier for Fintech to integrate with their systems. There also should be a clear technical checklist of what is needed for easy integration. Technical teams of banks need to be flexible and think like startups if they are to catch up with the ongoing disruptions.
Consumer Factors.
At the end of the day, all innovations are supposed to be consumed. One of the factors that hinder the move towards a cashless economy is the transaction cost and this heavily relies on the business model of both Fintechs and banks. Bank feels some of the proposed innovations by Fintechs increased consumer burden instead of helping the consumer hence they discourage such applications or services. The chances are if they introduce the services consumers might move to a competitor bank with the same service charged at a lower cost or at no cost at all.
Also, the size and nature of the market matter, some products or solutions don’t have a reliable addressable market enough for the banks to commit resources. Fintechs needs to spend a good amount of time to understand their market and design business models that will ensure they have a convincing size of the addressable market before approaching banks for strategic partnerships. Also, banks don’t want to be used as a tool for Fintechs to access the existing consumer base of the bank and move on. Banks want to see a win-win relationship and value addition to their consumers before they opened up the door to partner with the Fintechs.
To the banks, banks need to understand Fintechs brings in innovation and agility on how you engage with consumers and they have options to partner with other banks in the market. Creating a strategic pipeline to absorb these innovations will give you a strategic advantage over other banks.
Regulator Factors
We can’t run away from the regulators, banks, and Fintechs needs to work together in addressing regulatory issues. Some products struggle to succeed not because they are bad products but they don’t meet the regulations of central banks and other regulatory bodies. It is the responsibility of both Fintechs and banks to advocate for a flexible regulatory environment that encourages innovation rather than hindering. An environment whereby the regulator is more of a facilitator for the growth of the sector rather than an obstacle for further growth.
Bank in The Ecosystem
African banks have a very crucial role to play in the growth of the digital financial services ecosystem in the continent. They can be an anchor between different players operating in the ecosystem; fintechs startups, incubators, investors, and regulators.
Banks are strategically aligned to work with regulators to advocate for friendly policies that encourage innovation to ensure improved quality of services and accessibility for people at the BoP. Banks can also work with incubators and accelerators to identify high potential fintechs or otherwise run joint accelerator programs with existing incubators and business accelerators to create rooms for new innovative fintechs to excel. Banks they are also well-positioned to strategically work with impact and commercial funders (investors) to find modality to fund and invests on fintechs and other startups through different vehicles e.g Corporate Venture Capital Programs. They can also establish their own investment program for promising fintechs. The bottom line banks need to find a way to make a relationship with fintechs work. The disruption will continue to occur. The key issue is to ensure they remain relevant to the market.
This report has been prepared by;
- Jumanne Mtambalike — Sahara Ventures
- Najma Salum — Sahara Ventures
