Over two decades ago, the world of finance experienced a major paradigm shift, which was the birth of the internet. For the first time, customers were empowered to steer the market. They begun to determine the direction of innovation in the financial space through their tastes and preferences.
The global financial meltdown of 2007/2008 expedited this phenomenon even further, with the awakening to the fact that, the financial health of your bank has a direct impact on your personal wealth. Consequently, innovators went back to the drawing board.
In a bid to side-line the traditional financial system, bitcoin, blockchain, peer-to-peer lending, peer-to-peer mobile transfers and every other innovation under that umbrella proliferated. Today we call them fintech (Financial technology) and the companies or business models that offer these services, we refer to as fintechs.
With the advancement in technology today, right on their mobile phones, customers frequently interact with Artificial Intelligence tools (like Siri on Apple devices), facial recognition, voice commands, integrated payments and Near Field Communication (NFC), all of which grant almost-instant gratification.
Eventually, customers begin to expect same from their banks because really, “If I can order a box of pizza in a second and it is here in 15 minutes, why do I have to walk 20 minutes to the nearest ATM for my money; how do I pay for the pizza on arrival?” You might be thinking to yourself now “why didn’t this customer plan ahead to pay?” but the reality is, this happens hence, simplified in-the-moment banking is the new demand.
The challenge is thrown to banks, the world over, to satisfy these new demands. Meanwhile, fintechs are positioned nicely in that regard. We have witnessed the disruption that mobile payments have brought here in Ghana; unseating cheques by volume as the preferred means of payment. It is encouraging to see the Ghana Interbank Payments and Settlement System (GhIPSS) get their hands dirty in this space with the mobile money interoperability move; keeping with the trends.
However, banks (incumbents) have no cause to be intimidated. Fintechs are primarily dominant in the payments sphere alone and that is just one portion (although large) of the portfolio of banking services. More importantly, what we are currently witnessing is basically the unbundling of banking services by these companies; it is either a payments platform, a peer-to-peer lending platform, an investments platform or similar innovation. However, it is only but a matter of time until new-age customers begin to crave all of these services in one place rather than through multiple platforms or apps.
Banks have the working expertise in all the fields of banking to satisfy such a demand but may only lack the technological competence and innovative muscle that fintechs possess. Eventually, we find that incumbents and fintechs actually need to collaborate in order to harness synergies for this new world of simplified seamless finance. For instance, while fintechs may be hampered by increased regulation, banks have well-established compliance departments to navigate within the regulatory field. Again, banks have established trust with large customer bases that fintechs could only dream of. Ironically, because they are unlikely to be licensed deposit-takers, fintechs themselves have bank accounts. It is also worthy to note that, similar to other start-ups, fintechs may face capital limitations in launching high impact projects. However, strategic partnerships with incumbents could make this a win-win reality.
When it comes to emerging technologies, there is a lot of speculation that blockchain will replace banks. Just to make it clear though, blockchain is still considered a nascent technology and just like any other novel technology, it has some teething challenges to overcome. Notwithstanding, it has huge disruptive potential within finance. Actually, banks around the world have started blockchain projects to explore the opportunities to leverage the benefits this technology has to offer. A good example is what Santander is running with Ripple labs; a cryptocurrency company, for cross-border payments. From the foregoing, we see that blockchain may not completely replace banks in financial services but rather be employed in their business processes.
As the lean business phenomenon gains traction in contemporary business, it is unsurprising to have entered the banking space. Globally, banks are turning away from large branch networks to digital delivery alternatives. However, considering the prestige that comes with having a large branch network in Ghana as well as the level of illiteracy, such a move may be a bit of a stretch. Nevertheless, with the recent educational initiatives of the government and the generally obsessive nature of technology, the narrative may not be the same in the near future.
THE WAY FORWARD
Although the lean business banking model may not be a great fit for us, there’s no hiding the fact that thoughts and preparations should cover this area. Today, banks hold vast amounts of data which have a wealth of value in this data-driven era. Unfortunately, the value of this data is largely untapped. For instance, through Big Data Analytics, trends in the various banking services that customers receive at branches could be ascertained. With this knowledge, it is easier to identify those that could be digitally offered. These are prime services to be detached from the branch. Alternatively, they could still be rendered at the branch but through self-service terminals which are more appealing to millennials; a sense of control over your own finances. It is also worth noting that while the baby boomers and generation X continue to age, millennials are increasingly making up the bulk of wealth controllers.
Then of course, there are those components that cannot be easily executed remotely. An example is the Know Your Customer (KYC) process; where banks obtain the basic identity information of their customers. This is usually a major pain point when it comes to digital banking.
The good news is that KYC innovations are being rolled out around the world and these are built on the back of Artificial Intelligence and Big Data. This is how it happens: a customer uploads a clear picture (selfie) through a mobile phone as part of an electronic application process including a scanned copy of their photo ID card.
This information is received by a third-party fintech KYC verification provider (RegTech) contracted by the bank. Through facial recognition, selfies provided are matched with the photo ID card provided together with the wealth of data mined from the internet, mobile devices or other electronic gadgets. Hence, falsified documents and identities could be intelligently detected, making for robust KYC while seamless on-boarding of new customers becomes a reality.
In order for revolutionary innovation to take place in the Ghanaian banking industry, the real change agents; directors and top management, could take an intentional disposition towards innovation. That pre-supposes education and training to acquire a good understanding of the fintech landscape. This will facilitate budgetary allocation and sound value-giving business innovations. Obviously, it will be rather reckless to engage in something you do not understand.
With a comprehensive understanding and a good framework or policy around innovation, local banks could go a step further by organizing incubator programs for promising fintech start-ups or accelerator programs for more established fintechs in a bid to harness synergies. From these programs, those that are found to have a strategic fit could be partnered with or integrated. Since the financial demands could be huge, such a move should be solely based on value creation rather than a simple public relations (PR) move.
To put this into perspective, aside the regular lending a commercial bank is engaged in, it could look to fund or purchase a peer-to-peer lending platform as an additional line of business. However, this is subject to obtaining regulatory clearance from the regulator; Bank of Ghana (BoG). Notwithstanding, BoG has demonstrated openness to fintech innovations in recent times with the intention to set up a ‘regulatory sandbox’. Essentially, this is a controlled regulatory simulation where innovators can test their inventions to ensure that they align with regulation. Finally, organizing Hackathons, where experts from the field (fintech) could brainstorm with bank representatives, is a great source of ideas and innovation.
Banks are unlikely to lose their place in the financial system in the near future. However, their role in financial services will be very much different from what we know today. This places a responsibility on leadership to discover that role in order to remain relevant; whether it is rolling out new products, off-loading some parts of the banking business or engaging in strategic partnerships with fintechs. The balance may be somewhere in-between and the banks that find it, will lead the way in this innovative future of banking.
ABOUT THE AUTHOUR
Philip Twum is a fintech enthusiast who demonstrates his passion through public education on aspects like blockchain distributed ledger technology and participation in related communities.
He is an alumnus of the University of Oxford (Saïd Business School) Fintech Executive Programme and has a wealth of audit experience working for a ‘Big Four’ accounting firm in Ghana. Over the years, his experience has covered Financial Services and Consumer & Industrial markets. However, his main field of experience is in the Financial Services Industry.