With stories of fintech success and excitement showing up everywhere, it’s hard not to wonder about the place of banks in the financial landscape of the future. Are fintech providers here to stay or are they the buzz of the day?
The chief officer of finance, innovation and payments at Equity Bank in Kenya, John Staley, strongly stands in favor of banks. He recently argued that banks are in it for the long-term and that fintech companies will come and go – or get absorbed by the banking industry.
Where does Staley’s confidence come from? He points to business models and access to capital. According to Staley, payments services are not a sustainable business model. He believes the race to eliminate fees from payments that is taking place among large players will drive out any profitability for the small-scale fintech enterprises whose profit streams rely on them. He envisions more and more banks and larger companies like Google and Amazon eliminating transaction costs for customers altogether, creating a general unwillingness among customers to pay fees. Secondly, successful loan schemes require large sums of money for the long-term. John questions fintech companies’ abilities to maintain the required amount of liquidity for their loan portfolios.
With John’s views as a backdrop, we wanted to know what other players think about this critical, even existential, question. We asked our alumni and current fellows of the Africa Board Fellowship program, a group of banking professionals across Africa with more than a century of cumulative banking experience, to answer the question: Are banks the future of banking?
The shortage of support for Mr. Staley’s convictions was surprising. The fellows poked holes in his view using specific examples of policy or innovations that undermine his two main arguments.
Pace and Increments of Change
First of all, they doubted that traditional banks can keep up with changes in technology, and instead praised the ability of smaller technology startups to change and adapt to different market gaps and demands. Lloyd Borerwe, Acting Director of Microcred Zimbabwe, commented, “In my view, everything will depend on who embraces new innovations to achieve first mover advantage and scale. As someone said, the light bulb was not made from continuous improvement of the candle. If fintechs can bring something radically different they will definitely not be redundant.”
Sources of Capital
Secondly, the fellows critiqued the financing models of banking institutions and compared them to those of fintech companies. If fintech companies are able to mobilize cheaper capital in the future, their interest rates will compete with those of traditional banks. ABF advisor, Samuel Ssenyimba, put it simply, “The fact of the matter is just as mainstream funders saw the opportunity in microfinance 10 – 12 years ago, following initial success, they are now keenly observing the fintech space and a number are already beginning to back big players in the Americas, Europe and Asia. Additionally it would be foolhardy to believe Africa will resist this push.”
Finally, the largest discussion from the group related to regulations, with a debate about the level of support it offered to the future of banks. Currently, regulations in most countries limit the growth of fintech companies, causing them to partner with banks or mobile carriers in order to expand their services. But most fellows do not see this as a long-term barrier as more and more regulators adapt to the need for new technology in areas of financial services. Arguably the biggest example of this is the creation of payment banks in India. Jacqueline Musiitwa, Managing Partner of Hoja Law Group, said, “Many regulators are slow to fully understand new technologies, but there is the acceptance that the world and even financial services is becoming more digitized and so they too are adapting.”
However, all comments weren’t completely contradictory of Mr. Staley’s view. Most fellows believed in the continued existence of banks and confidently referenced the continued demand for traditional banking services by African consumers, mentioning that for many first-time formal banking users, doing business with an in-person banking agent might be preferable to an all-digital solution. They took the united stance of the answer may not be one or the other but continued collaboration and existence tangentially.
As if on cue, The New York Times published an article a few days after Mr. Staley’s statements noting that the U.S. Office of the Comptroller of the Currency is contemplating a new form of bank charter to enable fintech banking solutions. If it proceeds (though there are questions about the fate of the initiative in the new administration), the world will certainly take notice of such developments.
Overall, we all can agree that banking will continue long into the future… But will banks? Let us know your thoughts.
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