The role of financial institutions, particularly, banks as drivers of the economy cannot be overemphasised. Due to the essential nature of their intermediary roles between borrower and lenders of credit, the health of banks is of utmost concern for all stakeholders of the wider economy. As banks are for-profit institutions, the measure of their profitability is of significance to its shareholders and also regulators.
In recent years, the dynamics of the banking sector has seen a considerable paradigm shift with the advent of technology. The application of technology by individual banks, as well as the potentially disruptive nature of non-traditional, non-banking financial institutions has had a bearing on the operations and profitability of existing banks.
The financial industry in Ghana would hitherto have been described as plain-vanilla. It was characterized by the provision of the most basic services: deposit-taking, withdrawals and offering of rudimentary credit facilities. However, from the earliest days of a regulated financial industry, there has been the progressive implementation of various forms of technology to aid in service delivery.
The use of cheques eliminated the inconvenience caused by carrying large sums in notes and coins for transactions, the advent of Automated Teller Machines (ATM), mobile payments and distributed ledger technologies such as “blockchain” have revolutionised the way financial products are offered and accessed.
In a bid to attain improved efficiency, and in response to many developments within the sector, financial services providers have adopted and adapted a plethora of technological tools to suit their goals and circumstances. Increased competition, as a result of the emergence of more indigenous and foreign service providers has led to innovation on the part of many.
Also, the recent global and local financial crises eroded confidence of many customers in formal financial institutions. In addition, with a large informal sector and many, especially in rural areas, excluded from access to mainstream financial services, institutions have had to innovate to reach the ‘unbanked’.
The adoption, development and evolution of FinTech predates the twenty-first century. According to Arner et al (2015), the historical development of the use of technology in finance encompasses three distinct eras; 1.) Fintech 1.0 (1866-1987), 2.)Fintech 2.0 (1987-2008), and 3.) Fintech 3.0 (2008-current). Each era became synonymous with a specific technological agenda with the first focusing on infrastructure, the second on the bank, and the third (current) on start-ups.
Currently, FinTech is widely perceived, albeit erroneously, as a recent union between information technology and financial services. However, the incorporation of technology into financial service delivery is not novel.
Nevertheless, some of its most recent advancements and adoption can be traced to the systemic lapses which allowed the 2008 global financial crisis occur and the measures put in place to prevent a recurrence. Modern application of FinTech is broad and these financial start-ups have disrupted activities in the sector and aim to expand financial inclusion while cutting down the costs of operation significantly. The advent of the internet has given rise to platforms that were previously relegated to works science fiction.
FinTech is a blended word; an amalgamation of the words ‘finance’ and ‘technology’. Broadly, it refers to the incorporation of information technology to financial services. Whilst the phenomenon that is FinTech is not a new concept to the Ghanaian financial landscape, its adoption has witnessed exponential growth over the last decade.
FinTech, on the one hand, refers to institutions that utilize information technology to provide financial products and services that are typically beyond the scope of traditional financial service providers. On the other hand, it refers to institutions that provide tools to improve the competitive advantage of traditional financial services firms by providing faster and more convenient products and services to their customers.
The year 1997 was a watershed point for FinTech’s in the country as the then Social Security Bank (SSB) introduced the ‘Sika Card’ into the Ghanaian banking sector. Its purpose was to “eliminate the use of large sums of money for transactions.” the smart card served as an alternative to banknotes and cheques; enabling holders (both customers and non-account operators of SSB) to conduct cashless transactions with each other and the bank.
A decade later, in 2008, another crucial step was taken for FinTech’s as the state launched the national smart payment system platform; E-zwich. The interoperability of the E-zwich system offered banks, savings and loans companies, as well as other deposit taking institutions a platform within which to operate. The biometric data-enabled card, the first of its kind, was used effectively across the nation.
In 2009, MTN Ghana launched its Mobile Money (MoMo). The effect of which was nothing less than seismic; a move which was propelled by the rapid rate of mobile penetration and has in turn, driven the number of active mobile subscribers. The success of MTN’s MoMo – which recent data suggests has increased by 16.3% to 10.6 million, and is at par with the company’s data users – resulted in other telecommunication companies rolling out their variants.
In May of 2018, the mobile money interoperability system was launched. At its full implementation, the service made it easier to transfer funds between mobile wallets within and across networks.
Whilst FinTech transcends facilitating mobile payments, the earliest uses have been skewed in this direction. The success of the FinTech forebears has resulted in the emergence of other platforms such as Zeepay, Slyde, Hubtel and G-Money.
In keeping with the times, the ministry of Finance, in 2015, issued the Digital Financial Services Policy and the Bank of Ghana has formed a dedicated in-house FinTech division. These developments have led to the passage of the Payment Systems and Services Act in 2019, to regulate institutions that provide payment services as well as electronic money business and related issues, is a monumental sign of monumental progress from a legislative stand point.
The Act is part of the Central Bank’s broader strategy for creating an enabling environment that would facilitate retail payments and funds transfer mechanisms that are efficient and safe.
Many regulators struggle with achieving balance for the ever rapidly evolving the FinTech industry. For an increasing number of them, the answer to the balancing act of encouraging growth while ensuring stability lies in creating a regulatory sandbox.
The concept is straightforward: a separate regulatory entity is endorsed or operated by the regulator, allowing for limited-scale testing of new products for a fixed period, during which the normal regulatory requirements are relaxed or lifted entirely. For example, a FinTech company may be allowed to test a mobile payment platform on 2000 customers for three months, after which the regulator judges this performance against a previously agreed upon set of metrics. The regulator can then make a decision based on the risks and merits of the innovation.
The regulatory sandbox was pioneered by the UK’s Financial Conduct Authority in 2015, with the first FinTech firms utilising the platform for trials as recently as 2016. Sandbox tests have included cross-border and domestic blockchain-based payments solutions, consumer-oriented mobile applications, securities management platforms and new lending products. By early 2017 there were sandboxes at various stages of development in the US, Singapore, Hong Kong, Malaysia, Thailand and Switzerland.
Locally, the Bank of Ghana together with EMTECH LLC recently launched a regulatory and innovation sandbox pilot as part of its mission to promote and support FinTechs, as well as drive financial inclusion.
The sandbox will provide a forum for financial sector innovators to interact with the sector regulator to test digital financial service innovations while evolving enabling regulatory environment. It will be available to banks, specialised deposit-taking institutions and payment service providers including unregulated entities that have innovations that meet the sandbox requirements.
Partners to challengers
This increasing diversity and rapid development have made it difficult for banks to decide whether these technologies are a threat to business or a means to increase profitability. In some markets, however, the challenge to incumbents is unambiguous, with Fintech firms obtaining banking licences and competing directly with established lenders.
The emergence of FinTechs has changed the financial landscape. They have created cost-effective models that also provide a superior customer experience, and banks, from their lofty podiums have had to make adjustments. The future of banking in Ghana will depend on which banks can properly harness technology to improve services to their customers and FinTechs will be there every step of the way to provide solutions to the banks and the customers. Ultimately, efficiency will rise and perhaps, customers will begin to receive true value for their money.
The dynamics of ongoing pandemic and the resultant shift in consumer behavior and expectations will shape the future and with concerted efforts from regulators, FinTechs, banks and all other stakeholders, there is a very real opportunity for the Ghana to make significant economic leaps which hitherto would have been impossible.
God Bless our Homeland, Ghana and grant us an independent economy; one free from aid!
Baiden, L.E, 2020. Investigating the impact of FinTech on profitability of banks in Ghana
Arner, D.W., Barberis, J. and Buckley, R.P., 2015. The evolution of Fintech: A new post-crisis paradigm. Geo. J. Int’l L., 47, p.1-47.
Mawuli, J.A, 2019. Fintech in Ghana: Financial inclusion and the drive towards a cashless economy
The Oxford Business Group, 2019. Financial technology is driving the evolution of the global banking industry