Peering Into The Future: Banks’ Dominant Strategy In Response To Fintech Disruption
There is little novelty about the fact that banks are among the most rapidly changing institutions across the business landscape. Banks have gone through several facets of growth, and at every stage, three very vital elements are foundational to the transformation— evolution in regulation, customer behaviour and technology advancement– coupled with the emergence of new competitors.
Thus, with much certainty, the future of banking will not be a continuation of the past. New technologies will transform banking as we know it, providing both opportunities and challenges for the banking industry. While this phenomenon holds strong validity, it is no less peculiar to banks alone. Meanwhile, boundaries within the banking industry are getting blurrier and are widening the scope of products and services that banks can offer. But that also means the ease of entry of competitors.
Within this context, banks face ‘more’ fierce competition now, and Fintechs are the new competitors. Fintechs are more agile and disruptive, and specifically, are gaining market traction rapidly. Their presence has become more visible and well-accepted within the financial services’ ecosystem.
In this rapidly changing industry, what is banks’ dominant strategy with this new competitor?
EVOLUTION OF FINTECHS IN AFRICA
According to EY Fintech adoption index, the adoption of Fintech services increased globally from 15% in 2015 to 64% in 2019. Within same period, consumer adoption rates increased exponentially in developed and emerging markets such as UK, China, India, Russia, Netherland among others. That notwithstanding, Africa is quickly emerging strong in the Fintech space, globally.
In recent years, Africa has leveraged on the increased penetration of internet connectivity and internet use to serve as the best space for Fintech start-ups. Particularly, the success story of MPESA in Kenya, starting with mobile money services, has echoed the wide range of possibilities in the Fintech space. Currently, Fintech start-ups are growing rapidly in other regions of the continent including Ghana, Angola, Botswana, Cape Verde, inter alia.
Fintechs also leverage on their interoperability with other financial services to provide digital solutions to consumers. Fintech payment solutions are largely interoperable with Mobile Network Operators (MNOs) and banks in order to provide payment solutions to customers. For instance, Slydepay, a Fintech company in Ghana, supports the transfer of money to Ghana from credit or debit cards issued from non-Ghanaian banks. Users of this service can cash out their Slydepay money from any of the local mobile money networks.
Furthermore, Venture Capital investments into Fintechs has seen the Fintech industry skyrocket into higher growth levels. Fintechs have the highest penetration in South Africa, with 94% of individuals having regular access to the internet. In Q1 of 2020 alone, Fintechs raised close to $350 million. South Africa led the way with $112m in investments, followed by Nigeria, which raised $74m, Kenya at $62m and Egypt at $51m. In December, 2020, Zeepay, a Fintech startup in Ghana raised $940,000 in seed funding from GOODsoil VC to scale up its services into new territories across the continent.
PRE-COVID: THE EVOLUTION OF FINTECHS IN GHANA
Specifically, the revolution of Fintechs in Ghana has been rather recent. And landmark developments have been from independent Fintechs. That is from the use of mobile money services by Telcos such as MTN, and later Vodafone, Airtel-Tigo, to independent payment solution space— Zeepay, Expresspay, SlydePay, IT consortium, Hubtel, Accelerex, Digi teller, just to mention a few. Now, consumers can make mobile payments, money transfers, access loans and raise funds, as well as manage portfolio of assets using their mobile devices.
Prior to these developments, a little over a decade ago, banks were largely focused on their traditional business. At their nascent stage, the penetration of Fintechs seemed rather unlikely and
unanticipated. However, with the breakout of mobile money services by the telcos, especially MTN in 2009, that spurred a whole new shift for banks’ recognition of a likely competition from Fintechs.
The use of mobile money services has been supported by the Central Bank, as the regulator recognised the role mobile money services play in deepening financial inclusion. Thus, regulation by the Central bank aimed to accelerate this process. As the acceptance of the mobile money services grew, other Fintech start-ups joined, thereby increasing their presence within the financial ecosystem.
From then on, Banks’ response has been mixed, considering that mobile money services and other Fintech payment solutions have come to stay, banks began adopting strategies to either adopt the innovation and integrate into existing business or partner Fintechs for innovative digital solutions. For instance, Zenith Bank, UBA, Fidelity Bank among others have all formed partnerships with Fintechs. Some other commercial banks such as GCB recently launched a digital wallet service, G-Money which is fully interoperable.
Ghana has transformed its Fintech industry to embrace the use of smartphones and applications in transactions. Available data suggest that, there are over 11 million active users on mobile payment systems, with banks recording over 80% of their transactions as originating from electronic and digital channels. The Bank of Ghana (BoG), reports that about 71 Fintech companies operate in the country.
The COVID-19 pandemic has accelerated banks’ response to Fintech disruption. From banks limiting their branch access and contact hours, to the fear of the COVID-19 virus tainting paper notes and coins, the pandemic has accelerated the changing relationship between customers and their banks. And this, in no doubt, has been a great test for the industry— risk several banks losing touch with customers and disguised accelerated growth via innovating.
All the while, it has also brought into sharp focus, the need for banks to explore ways to get in touch with their customers. Thus, a whole new debate on the response of banks to Fintech disruption has been brewing as a result.
The contention is whether banks should aggressively compete with Fintechs, thus, disrupting them by providing new digital products or to collaborate with Fintechs, leveraging on the agility and innovation of Fintechs.
Recent happenings indicate the growing recognition of the input of Fintechs toward increasing financial inclusion in the country. As such the Bank of Ghana has issued enhanced Payment Services Provider license to some selected Fintech companies in the country. This development indicates recognition of the impact of Fintech companies within the financial services landscape.
PLAYING THE DOMINANT STRATEGY: BANKS TO COLLABORATE OR TO COMPETE WITH FINTECHS
By playing their dominant strategy, banks make an optimal move regardless of the course of action of Fintechs. Considering the foregoing, banks in Ghana have been faced with one of two responses to make: to either play the Fintech game too, via competing head-on or collaborate by forming partnerships with these Fintech companies.
With the former move of advantage, large banks are formidable enough to either disrupt the innovation or embrace it completely. With the latter move of advantage, banks focus on where they have comparative advantage, while also leveraging on the agility and innovation of Fintechs.
To illustrate, MIT Sloan displays a framework that categorizes these responses to disruptive innovation. Based on the framework, two factors affect banks’ response: motivation and ability.
Judging by current actions, most banks in Ghana, especially, large banks are at the top right quadrant. They have literally moved far away from displaying high ability but low motivation to respond to the disruption, as with those in the top left quadrant. Now, most banks in the top right quadrant display high ability and high motivation to respond to the disruption. Albeit, the response required within this quadrant had been gradual a few years ago. However, the new normal of banking, facilitated by COVID, is accelerating the process.
Essentially, there are several dynamics to responding to disruption at the top right quadrant. First, banks can attack back by disrupting Fintechs— playing one game. That is, banks can compete head-on by emphasizing new, non-traditional product or service attributes by targeting new customers.
With this decision, overtime, the Fintechs scale up and draw-in loyal customers of banks, thus overtaking banks, and the cycle goes on and on. That notwithstanding, banks can decide to adopt the innovation by playing both games at once. However, such decision is based on a cost-benefit analysis.
By emphasizing the top right quadrant, how banks choose to adopt is the real question. Banks may choose to adopt the innovation by either operating separate organizational units or by integrating the innovation into existing business. Meanwhile, banks can also adopt the innovation by collaborating to compete.
Each of these decisions rest on the extent of the ability of banks (i.e. capital, resources, and expertise) to keep innovating, since the capital involved is huge. The current situation in Ghana indicates a mixture of these responses. While some banks have adopted the innovation by integrating into their business, such as the GCB’s G-Money, some others are collaborating with Fintechs.
However, adopting the innovation through collaboration between established banks and Fintechs yields a win-win for both sides; banks gain the agility and innovation of fintechs, while offering years of customer loyalty, scale and established networks alongside. Banks also do not have to commit huge capital to have their own Fintech start-ups.
Even so, banks may be caught up in the unending conflicts between focusing on their traditional business and then operating Fintechs. Furthermore, Fintechs have already penetrated the informal market and are therefore making inroads already. Thus, by collaborating with Fintechs, banks can have access to this new market of customers to improve the banking sector.
Going forward, collaboration between banks and Fintechs should be deepened, while also aligning with bank’s strategy and values. And also they should benefit both partners in order to ensure long-term alignment and the longevity of the collaboration.