Collaboration between traditional banks and fintech companies: the game changer to drive financial innovations and inclusion in Africa

The evolution of fintech innovations in Africa is not in happening a vacuum. It is on the back of a historical financial service industry with tried and tested, regulated, and developed service providers – traditional banks. Therefore, the emerging need to encourage new financial innovations cannot be a call for competition that seeks to replace traditional banks with fintech companies. Rather, we must seek to harness the enormous benefits of both ends through collaborations.

TRADITIONAL BANKS

The key focus is not to discuss how traditional banks perform their services but to look at some advantages they have gained in performing their duties. On average, traditional banks across Africa have more than a decade-plus history of operations and have developed into leading brands. Some traditional banks are centuries old and have established the presence and operations across many countries on the continent demonstrating the stability and certainty of their operations. In the process, they have gained consumer trust and built brand equities and operational resilience.

People are also central to the operations of traditional banks. The staff list of banks includes persons with competence in various operational demands of financial service offerings. These people have been recruited, trained, and have become the brains for the sustained operations of traditional banks over time. Their understanding of the development, deployment, and review of financial services, compliance, risk, customer service, etc. cannot be discounted. Demonstrably, traditional banks have evolved by themselves through history, using their people, no matter how slow their response to innovations has been.

In terms of business, traditional banks have evolved from ideas into licensed operations with verifiable services and products. With time, they have also demonstrated compliance with the demands of their licenses and have remained in operations, undertaking expansions, opening new branches, and offering new products and services. On the other hand, formal banks provide services for end users – customers. Over the years, they have recruited millions of active customers and continue to develop initiatives to recruit new ones. The service offerings to these customers have enabled profitability for them and offer the opportunity for the development of innovative products based on existing relationships.

Finally, they have made and continue to make huge investments in systems, and information technology (IT) infrastructure to support their operations. Although some of these investments are in fulfillment of their licensing and operation as banks, they also support the delivery of a 24-hour service, protection against fraud, cyberattacks, and breaches of customer data among others.

FINANCIAL TECHNOLOGY (FINTECH) COMPANIES

The emergence of fintech companies presents some advantages which existing financial service providers can harness to improve their service offerings. The advances in technology in the form of blockchain, artificial intelligence (AI), machine learning, etc. have opened wide the doors of possibilities for new ways of providing service across many industries including finance. The net effect is that fintech companies are leveraging these advances in technology to develop new products and services in payments, savings, lending/credit, remittances, crowdfunding, and investments among others. In Africa, a good example of such innovation is mobile money with enabled wallets, which allow customers to perform financial services on their mobile phones without visiting a branch of a bank.

Fintech companies are also credited with “speed” in terms of product or service development and deployment. This is made possible by the lack of bureaucracy, which is a key feature of the operations of traditional banks. The response time of fintech companies is quicker and facilitated by their strong desire to gain market advantage as new businesses. Concerning the cost of operation, Fintech innovations have proven to be less costly to run despite the investment outlay required for licensing and operationalization. The heavy reliance on technology coupled with the benefits of a reduction in operational cost has significantly made fintech operations less expensive compared to the establishment of physical banking infrastructure.

They also have the potential to reach a wider customer base and achieve higher market penetration. An example is the adoption and penetration rates of mobile money innovations across Africa. The high financial inclusion rates recorded by many African countries were made possible by mobile money innovations. The nature of fintech innovation makes them easier to penetrate markets and reach a wider customer base. With an internet-enabled device or feature phone, a customer anywhere can access and perform financial services.

Finally, the brains behind emerging financial innovations are young people and this trend is going to continue. Young people are taking advantage of technology, and insights to develop amazing new products and services that address pain points for consumers – either at the individual or business levels.

THE NEED FOR COLLABORATION AND PARTNERSHIPS

The call for collaboration and partnership is to prompt the consideration of leveraging synergies. Traditional banks and fintech companies can constitute joint project teams with specific scopes of reference and support to design co-branded products or services with mutual ownership of ensuing intellectual property assets.

The skills and competence of Fintech to develop innovations can help traditional banks. Instead of outsourcing to primary software or technology development companies, traditional banks can outsource innovations to fintech companies with a better understanding of the financial services industry.

On the other side, traditional banks must also facilitate and run innovation sandboxes where fintech companies are granted access to their platforms to test and innovate new solutions. Under various partnership arrangements, traditional banks could adopt innovations by fintech companies and run with them.

CONCLUSION

Due to the significant importance of traditional banks to the financial sector, deliberate attempts must be made to drive collaboration between emerging fintech companies and traditional banks to protect the integrity, gains, and stability of the financial sector while driving greater financial inclusion.

About the author

Richard NUNEKPEKU is a Fintech Consultant and the Managing Partner of SUSTINERI ATTORNEYS PRUC (www.sustineriattorneys.com) a client-centric law firm specializing in transactions, corporate legal services, dispute resolutions, and tax. He also heads the firm’s Start-ups, Fintech, and Innovations Practice divisions.